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Sprint PCS Strategy Case Study
 

Sprint PCS Strategy Case Study

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MBA strategy case study on Sprint PCS's options for growth in 2001

MBA strategy case study on Sprint PCS's options for growth in 2001

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    Sprint PCS Strategy Case Study Sprint PCS Strategy Case Study Document Transcript

    • University of Michigan Business School December 13, 2001 Sprint PCS: Winning the Wireless War? It was Ravi Gopal's first day at his summer internship. He had recently finished his first year of MBA studies at the University of Michigan Business School and was elated about his future prospects as a research analyst at a top investment-banking firm. The wireless industry excited him and the assignment in front of him was a perfect start. But before he delved deep into the wireless giant, Sprint PCS, he needed to become familiar with the wireless industry. In late 2001, Sprint PCS was poised to capitalize on the tremendous projected growth in wireless data services. With the only all-digital nationwide network in the United States, the company had a clear technology path to providing high-speed wireless data capabilities across the country. As the fastest-growing wireless carrier in the U.S., the company had announced third quarter subscriber growth nearly double that of its closest competitor. Sprint PCS could attribute much of its success to the strength of its parent company, Sprint, with an impressive 95% brand awareness 1 and a vision of providing high-speed, always-on voice and data connectivity via wireline or wireless, all from a single provider. Still, the future was uncertain for Sprint PCS and as the company headed into 2002, management faced many strategic issues. The company was going against the grain, depending on a technology called Code Division Multiple Access (CDMA) in lieu of other, more accepted global standards. They had just lost a major competitive advantage when the Federal Communications Commission (FCC) voted to remove limitations on the amount of radio spectrum each carrier could use. This gave competitors access to the bandwidth needed for their less efficient technologies. In addition, the market for wireless data was far from well defined. Despite massive industry growth projections, adoption rates were low with only 10% of Sprint PCS customers using its wireless Internet capabilities 2. Analysts were uncertain of the real need for mobile users to access data and their willingness to pay for such services. As he read the industry profile complied by his manager, many tough questions raced into Ravi's mind. What were the key success factors in the wireless industry? Would Sprint PCS be able to survive the threat of disruptive technologies? Were they being rational in betting on CDMA technology, and sacrificing worldwide compatibility? With mobile phone penetration at only 45%3, there was still substantial opportunity in the voice communications market, casting doubt Sprint 2000 Summary Annual Report. 2 Sprint PCS. 9 Dec. 2001 <http://www.sprintpcs.com/aboutsprintpcs/mediacenter/2000/00L10_19A.html >. 1 This case was written by MBA candidates Mary Bruening, Jonathan Chizick, John Gearty, Ravi Gopal, and Srini Venkat under the supervision of Dr. Allan Afuah, Professor of Corporate Strategy at the University of Michigan Business School. This case is intended as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. 3 UBS Warburg, Sprint PCS report, 22 Oct. 22 2001.
    • SprintPCS Revenue Growth $6,000 $5,000 6, $4,000 $3,000 $2,000re $1,000 $- 1998 1999 2000 Year Sprint PCS: Winning the Wireless War? on the company's data- focused strategy. Would customers pay more for data services? Would they pay enough to generate positive ROIs on massive 3G technology upgrades? Global standard technologies threatened Sprint PCS' position with lower supplier costs and global roaming capabilities. How could the company best capitalize on its massive investment in a nationwide network and its strong market position? The more he read, the more overwhelmed and nervous he became. Ravi wondered if he had made the right decision to focus his internship on the wireless industry. Sprint PCS History Sprint had been a major player in the U.S. telecommunications industry for over one hundred years. The firm began as Brown Telephone Company in 1899. Throughout the twentieth century, the company underwent tremendous growth and numerous name changes, emerging as one of the major U.S. telecom carriers. In 1994, Sprint announced a plan to partner with three major cable and television companies in a new venture to provide nationwide wireless personal communications service (PCS). In 1995, Sprint and its partners won the rights to wireless licenses in 29 major U.S. markets in an FCC auction. With these requisite assets in hand, the new venture was launched and named Sprint PCS. Under the agreement, Sprint held 40% of the venture. Its new partners held the rest, with Tele-Communications Inc. (TCI), owning 30%, and Comcast Corp. and Cox Cable each owning 15%. 4 After evaluating a number of analog and digital technologies, Sprint PCS decided on Code- Division Multiple Access (CDMA) as the basis for its infrastructure. CDMA, developed and licensed by San Diego-based Qualcomm, was a digital protocol with voice and data transmission capabilities. CDMA had a number of advantages over other technologies. It was more "spectrally efficient", meaning it required less bandwidth, or wireless spectrum. It provided efficiency 10-12 times greater than analog technologies and at least twice that of other digital technologies. 5 Since the FCC capped spectrum usage at 45 MHz of bandwidth per carrier and since bandwidth licenses were expensive to purchase in government auctions, CDMA provided Sprint PCS a great competitive advantage. CDMA 4 Monster.com . 12 Dec. 2001 < http://company.monster.com/sprintpcsi >. 5 Silicon Insights: Spectral Efficiency, 17 July 2001. Figure 1 Source: Sprint PCS 2000 Summary Annual Report also offered inherent security, superior voice quality, and data transmission capabilities. Sprint PCS weighed these data capabilities heavily in their decision, as it expected business users to soon begin acknowledging a need for mobile e- mail and Internet access. 2
    • • Sprint PCS: Winning the Wireless War? In just 18 months, the company built and launched a nationwide voice network serving 150 metropolitan markets. Revenues exploded, reaching $1.2bn in only its second year of operation. Sprint PCS subsequently launched its Sprint PCS Wireless Web service in late September 1999 6, allowing users to access e-mail and wireless-enabled web pages from their phones. Later, the company introduced products that allowed its customers complete access to the Internet from their laptop PCs, either by connecting their mobile phones to their computers or by inserting a Sprint PCS wireless card. In May of 1998, Sprint announced its intention to buy out its partners and acquire 100 percent ownership of Sprint PCS. In a series of steps, Sprint PCS became a unit of Sprint and an initial offering of Sprint PCS stock was issued, allowing Sprint and Sprint PCS to trade separately on the NYSE. As of September 2001, the company's total customer base had reached 11.82 million subscribers, constituting over 10% of the total U.S. mobile telecom market. The Sprint PCS network covered 360 metropolitan areas and 85% of the U.S. population. Subscriber growth for the previous quarter was 19%, while the industry as a whole grew at only 10%. Still, only 10% of its subscribers were using Wireless Web capabilities. 8 Industry Background In 2001, the wireless market for voice services was maturing. Customer penetration stood at 45% with an estimated 121.3 million subscribers. 9 This represented growth of 27% from the previous year. The overall growth of the U.S. wireless market is shown in Exhibit 1 As wireless phone penetration approached saturation levels, which were estimated in the 60% - 70% range, 1° companies were left with tough decisions to make — continue to focus on voice, or diversify into data services. The subscriber base for data services had reached 8.4 million by November 2001, and was expected to grow to 52 million subscribers in 2005. 11 The introduction of national flat-price plans by carriers was driving wireless voice into a commodity market. To differentiate themselves, carriers spent a lot of resources on marketing programs to enhance branding. Meanwhile, the industry was consolidating with mergers and acquisitions. The transition from a high- growth to a maturing market changed the way analysts evaluated wireless carriers. With the lack of a compelling 'killer application' outside of voice communication, the market became skeptical of forecasted returns. Controlled Airwaves Having access to a band of radio frequencies for transmission, referred to as spectrum, was a large barrier to entry in the wireless market. Spectrum available for wireless transmission 6 Sprint PCS. 9 Dec. 2001 <http://www.sprintpcs.comiaboutsprintpcs/mediacenter/2000/00_10_19A.html >. 7 Sprint PCS Analyst Report, Lehman Brothers, 25 Oct. 2001. 8 Sprint PCS. 9 Dec. 2001 <http://www.sprintpcs.com/aboutsprintpcs/mediacenter/2000/00_10_19A.html >. 9 Industry Surveys, Telecommunications: Wireless, Standard & Poors, 1 Nov. 1 2001: 1. I° Ibid. II Cahners In-Stat Group, Wireless Week, 5 Nov. 2001: 24. 3
    • Sprint PCS: Winning the Wireless War? extended from AM radio frequencies up to infrared frequencies. Improvements in wireless technologies allo wed operators to move to higher frequency ranges in the wireless spectrum. Moving to higher frequencies allowed for more bandwidth and higher quality; however, this also reduced the range of cellular transmitters and increased the cost of cellular deployment due to the need for additional transmission towers. In the U.S., the FCC regulated the spectrum, and allocated narrow bands to wireless operators. Exhibit 2 shows the spectrum allocation in the U.S. at the end of November 2001. License Regulation When wireless services were first introduced, governments around the globe gave away licenses to operators. From 1981 until 1996, the FCC regulated the wireless market in the U.S. as a duopoly. There were 305 designated Metropolitan Statistical Areas established. Two licenses, one for an incumbent telephone operator and another for an outside competitor, were granted. This changed with the Telecommunications Act of 1996. Any given market could have as many as nine wireless operators, and licenses were auctioned. In 2000, the U.S. and the European Union began selling designated sections of spectrum for 3G technologies through public auctions. This forced wireless operators to pay billions of dollars to obtain spectrum rights, steeply increasing capital requirements. For instance, the April 2000 auction of 3G licenses in the U.K. fetched the U.K. government US$35bn (equivalent to US$572 per inhabitant of the U.K.). Industry Consolidation One key factor driving consolidation in the wireless space was the need to have national size and scope to create customer value. This resulted in a wave of mergers among regional players. The lack of capital and need to share high infrastructure costs were seen as additional drivers of consolidation. AT&T Wireless' introduction of a national one-price plan in mid-1998 forced other industry players to consolidate to remain competitive. Ironically, AT&T's one-price plan led the firm to lose its No. 1 position to Verizon Wireless, formed through the combination of Vodafone, AirTouch Communications, and Verizon Communications. Other major consolidations included Cingular Wireless, a joint venture formed by SBC Communications and BellSouth Corporation; and the acquisition of VoiceStream by Deutsche Telekom. The removal of the spectrum cap by the FCC in late 2001 was expected to lead to even more industry consolidation. Prior to removal of the cap, carriers could not acquire more spectrum through acquisitions. Thus, the removal of the cap meant consolidation could provide more spectrum in targeted markets and increase carriers' previously limited potential share-of-market. Globalization Globalization was one of the most visible trends in wireless communications. A lack of restrictive wireless regulation led to a rapid expansion of incumbent players across their traditional home markets. Additionally, in Europe, the existence of a single technology standard created a favorable environment for cross-border ventures. In contrast, the presence of multiple standards in the U.S. hindered globalization, while firms focused to consolidate within. 4
    • Land based s ubscriber Toll office To other offices (local and toll) Local office WI re line Carrier Non-wireline carrier "'Directional pattern of one cellsite Mobile Telecommunications Switching Office Voice channels (Not all channels shown) --- Control paths Local office 1984 Bell System Amps Plan, modified from the original Figure 2 • Sprint PCS: Winning the Wireless War? Although globalization was considered a standard growth strategy, it came at a cost. Firms realized creation of a single brand name across the world was more difficult than expected. Managing disparate and far-flung technical assets was complex. In addition, international acquisitions increased indebtedness of parent companies. Average Revenue Per Unit (ARPU) ARPU is often used to proxy the wireless industry's profitability. ARPU gauges the average monthly revenue generated for each customer unit (mobile phone). In general, industry-wide ARPU declined steadily. Price pressure, resulting from an extremely competitive environment, was believed to be the primary cause. The fall in roaming charges was also believed to add to this trend. However, increases in minutes used and adoption of value-added services, such as wireless data, was expected to reverse the ARPU decline. Wireless Technologies By mid-2001, numerous wireless technologies were in existence. Coupled with differences in standards within each class of wireless infrastructure, the wireless technology landscape was complex. The most popular technologies fell broadly into three groups — Cellular Technology, Satellite Technology, and Wireless Local Area Networks. Cellular Technology (see Exhibit 3 for glossary of terms) • First Generation (1G) Bell labs developed the first wire- free large area communication called a cellular telephone network and it derived its name from the small geographic regions called "cells" into which a large contiguous area was divided. The commercial system that started it all was AMPS (Advanced Mobile Phone Service), which was a standard system for analog telecommunications in the United States. Introduced by AT&T in 1983, AMPS was still the most widely used system in the U.S. in 2000 (Exhibit 4). It used the 800-900 MHz frequency spectrum (known as the 800 MHz band) for cell phones. AMPS was referred to • as a first-generation, or "1G" system in the 1960s. This was 5
    • Sprint PCS: Winning the Wireless War? technology and was both analog and circuit-switched. Figure 2 shows the vision for 'AMPS' in 1984. This 1G technology suffered serious drawbacks. Links were poor and handoffs unreliable. The analog system caused excessive power consumption resulting in heavy, bulky equipment requiring frequent battery recharges. Second Generation (2G) Further subdivision of frequency spectrums using TDMA, or time division multiple access, resulted in digital AMPS (D-AMPS). DAMPS provided a 3-to-1 capacity gain over analog technology. An alternative way to allocate spectrum was via a second- generation technology, CDMA (code-division multiple access), which multiplexed information for all users across the entire frequency range. Using "spread spectrum" techniques, CDMA took the user's data and scattered it arbitrarily across a wide channel. CDMA's ability for a 'soft handoff meant all phones operated on the same frequency. The first CDMA technology was developed by Qualcomm, and named CDMAOne. It supported variable bandwidth connections, with enhanced standards at 13 & 64 Kbps (kilobits per second). This 'bandwidth-on-demand' limited the number of connections to a particular base station. Below is an analogy between TDMA and CDMA, based on a statement from Qualcomm: "Imagine a room full of people, all trying to carry on one-on-one conversations. In TDMA each couple takes turns talking. They keep their turns short by saying only one sentence at a time. As there is never more than one person speaking in the room at any given moment, no one has to worry about being heard over the background din. In CDMA, each couple talks at the same time, but they all use a different language. Because none of the listeners understand any language other than that of the individual to whom they are listening, the background din doesn't cause any real problems. " 12 CDPD (Cellular Digital Packet Data) was a 2G technology that used TDMA protocol to allow users to access wireless data at 19.2 Kbps. It was optimized for TDMA networks and worked in the 800 MHz frequency band. CDPD had been in existence since the 1980s and had proven to be a reliable method of data transmission but had limited potential (Exhibit 5). GSM (Global System for Mobile Communications) was gaining ground as a global standard. European carriers were almost exclusively using GSM, which gave it a great deal of momentum. It used a variation of TDMA and operated in either the 800 MHz or 1800 MHz frequency band. SMS (Short Message Service), an instant-messaging service popular in many European and Asian countries, was started with GSM. CDMA was incompatible with TDMA and GSM. 12 Archtronix. 4 Dec. 2001 <http://www.arcx.com/sites/CDMAvsTDMA.htm >. 6
    • 2G 2.SG 3G EDGE •=...1/4 UPIC-136 spRs imp ($S136 HS? fmat EDGE) HADC —" 151 1111313) WCOMA 13GPP) PDC cdma2000 amip mmummespipmNIK (3CPP2) fillinfoimmurrE"'14 i558 • • Sprint PCS: Winning the Wireless War? • Second-and-a-half Generation (2.5G) Although there was no formal definition for what differentiated 2.5G and 3G technologies, GPRS (General Packet Radio Service) was widely regarded as 2.5G. It was based on GSM technology and transmitted in the 56-114 Kbps range. More importantly, GPRS had 'always-on' connectivity. CDMA evolved into 2.5G with CDMA2000 lx, also developed by Qualcomm. This new version was already being deployed by Sprint PCS in late 2001 and demonstrated rates of 153- 307 Kbps, the highest of the 2.5G technologies and arguably bordering on 3G capabilities. It was the first CDMA technology to allow 'always-on' capability. Faster technologies eliminated the need to use wireless middleware, increasing speeds at which users could access data on a mobile device. Other 2.5G protocols included high-speed circuit- switched data (HSCSD), which was a circuit-switched protocol with data rates up to 38.4 Kbps. Third Generation (3G) EDGE (Enhanced Data Rate for Global Evolution), the next evolution of GSM, was essentially a faster version of GSM. Its top speed was 384 Kbps and it also used TDMA structure. It was regarded as an evolutionary step toward UMTS (Universal Mobile Telecommunications Service), which was a 3G, packet-based technology, capable of up to 2 Mbps (megabits per second) transmissions. Figure 3 Source: <http://www.csdmag.com/main/2000/01/0001 edge 1 .htm> Another CDMA variant, called WCDMA, was a 3G technology supporting data rates up to 384 Kbps (for wide area access) or 2 Mbps (for local area access), and was optimized for multimedia applications. This technology was not backward compatible with other CDMA technologies, but was arguably a slightly better technology for carriers building a 3G network from scratch or upgrading from GSM networks. It therefore became a more accepted standard for carriers not currently using CDMA. Qualcomm was busy developing its answer to the demand for 3G data services. Its response would come with the development of CDMA2000 1xEV, a direct descendant of CDMA2000 1 x. This new protocol delivered data at speeds up to 2.3 Mbps, offered `always-on' connectivity, and was backward compatible with its predecessor. For carriers currently operating on CDMA, this would be the 3G technology of choice. 7
    • Sprint PCS: Winning the Wireless War? Qualcomm's holding of many CDMA patents made them a giant in the market. Qualcomm had granted royalty-bearing licenses to more than 75 CDMA manufacturers, many of who covered 3G applications. The battle between WCDMA and CDMA2000 can be seen in Figures 3 and 5. Figure 4 summarizes the technical specifications of the various protocols and Exhibit 5 shows the projected rise in data rates. Exhibit 6 shows standards-setting bodies and consortia that had been active with cellular technologies. Protocol Data Rate U.S. Frequency Band iGeneration AMPS N/A 800 MHz 1G CDPD 19.2 Kbps 800 MHz 2G TDMA 14.4 Kbps 800,1800 MHz 2G GSM 14.4 Kbps 800,1800MHz 2G CDMAOne 14.4 Kbps 800,1800 MHz 2G GPRS 56-114 Kbps 800 MHz 2.5G HSCSD 38.4 Kbps 800,1800 MHz 2.5G CDMA2000 lx 153-307 Kbps 800,1800 MHz 2.5G UMTS 2 Mbps 800,1800 MHz 3G EDGE 384 Kbps 800,1800MHz 3G CDMA2000 1xEV 144k-2.3 Mbps 800,1800 MHz 3G WCDMA 384k-2 Mbps 1800 MHz 3G Figure 4 Competition Cellular Operators Sprint faced a number of direct competitors in the U.S. wireless telecommunications industry. All of these firms faced two significant challenges — how to transition their networks to 3G technology and how to achieve a positive ROI on the purchase of new spectrum licenses required for 3G. Exhibit 8 summarizes the current state of the major U.S. competitors. As shown in Figure 5, each U.S. wireless competitor faced a different migration path to 3G implementation. For companies such as Sprint and Verizon, which used CDMA technology, the upgrade process to CDMA2000 lx was straightforward. This upgrade required only the installation of new "channel cards" at each of the transmitting base stations, and three software upgrades at various points in the network. Such an upgrade was relatively inexpensive. However, for companies such as AT&T and Cingular, who used TDMA or GSM technology, the upgrade path to full-blown 3G was not as straightforward. These firms planned major network upgrades, from GSM to GPRS to EDGE, and finally to WCDMA. The last step was more of a complete network rebuild than an upgrade. Since building a nationwide network costs in the neighborhood of $10bn, this cost was not negligible. In addition, customers needed new devices 8
    • 3G Technology Migration Paths (1170 42..0 AT&T Volc-eStream Sprint PCS Cingular Cingular Verizon IoV • Sprint PCS: Winning the Wireless War? to receive service. Because of these costs and the spectrum demands, deployment of WCDMA was expected to be delayed until 2004 or later. • Verizon On April 4, 2000, Verizon Wireless was created as a new coast-to-coast wireless network venture between Verizon Communications, with 55% ownership, and Vodafone Airtouch with 45% ownership. As of November 2001, it was the market leader in the United States with 28.7 million customers and quarterly revenues of approximately $4.4bn. 13 The company's network footprint covered nearly 90% of the US market with 49 out of the top 50 and 96 out of the top 100 regional US markets. 14 Part of Verizon's strategy was to expand its capacity in major markets such as New York, Boston, Los Angeles, Chicago, Philadelphia, Washington D.C., Seattle, and San Francisco. It was the winning bidder for 113 licenses in the FCC's January 2001 auction for 1.9 GHz of spectrum. However, this added capacity came with a high price tag - $8.8bn, but was seen as placing Verizon in a position to be prepared to launch 3G technology. 15 Figure 5 Source: Sprint PCS website, <http://www.sprintpcs.com >, Dec. 2001. • Verizon used two types of technologies on its wireless networks: AMPS and CDMA. Verizon planned to upgrade its network to CDMA2000 lx, which would support data transmission speeds of 7Q - 150 Kbps, and then to CDMA 2000 1xEV. The investment costs involved only software upgrades and the transition was a two-step process. However, there were two considerations that had the potential to slow this transition. Verizon and its partner Vodafone were contemplating how to effectively align Verizon's CDMA network and Vodafone's GSM system in the transition to 3G services. Secondly, with these multi- standard networks, upgrades could be more costly. Rough estimates indicated that in addition to the $8.8bn recently spent to purchase licenses, Verizon would have to spend $1bn to upgrade to CDMA2000 lx and an additional $7bn to reach CDMA2000 1xEV. 16 Cingular Cingular Wireless was a joint venture of the wireless divisions of SBC and BellSouth. SBC owned 60 percent of the company and BellSouth 40 percent. Cingular was the second-largest 13 Industry Surveys, Telecommunications: Wireless, Standard & Poors, 1 Nov. 1 2001:4. 14 • Verizon Annual Report, 2000. 15 Industry Surveys, Telecommunications: Wireless, Standard & Poors, 1 Nov. 1 2001. 16 Sprint PCS. 4 Dec. 2001 <http://www.sprintpcs.com/aboutsprintpcs/Cdma_3g/ >. 9
    • Sprint PCS: Winning the Wireless War? player in the U.S. wireless industry, with 21.2 million customers as of the first half of 2001. Cingular posted second quarter 2001 revenues of $3.6bn and held 21.2% U.S. market share. 17 Cingular used 3 technologies in its network: AMPS, GSM, and TDMA. Future plans included evolving to EDGE later in 2001. Eventually, Cingular planned to upgrade to WCDMA technology. 18 Cingular recently spent $2.3bn in additional licenses and rough estimates indicated that $1.4bn would be required to upgrade to GPRS, $5.lbn to upgrade to EDGE, and $9bn to finally rollout WCDMA technology. 19 AT&T Wireless AT&T Wireless ranked third in mobile phone services provision in the U.S. It had 16.4 million subscribers with a 16.4% market share and $3.4bn in second quarter revenue. 20 AT&T Wireless was spun off in 2001 as part of its parent company's restructuring. NTT DoCoMo, which was partnering with AT&T Wireless to develop mobile multimedia services, owned a 16% stake, while the parent company AT&T retained 7%. AT&T Wireless offered service nationwide and had expanded its geographic footprint through a series of mergers. As of November 2001, AT&T used AMPS and TDMA technology for its wireless network. AT&T's current CDPD network spanned across the U.S., but was likely to become obsolete in the short-term. Their future strategy included using a GSM-based approach to evolve its networks to 3G services. The first step in the migration involved the addition of GPRS channels. AT&T hoped to have this 2.5G solution in place by the end of 2002. The final step in their 3G migration plan was to offer WCDMA technology in the 2004 timeframe. 21 AT&T Wireless had spent $2.8bn on additional license purchases and was expected to require $2.8bn more to upgrade to GPRS, $5.lbn to upgrade to EDGE and $9.0bn to upgrade to WCDMA. 22 Nextel Nextel was a smaller player, but was gaining market share. Primarily focused on business customers, in 3Q 2001 it had 9.6 million subscribers, 7.7% market share and $2bn in quarterly revenue 23 . Nextel used Motorola's integrated digital enhanced network (iDEN) technology for cellular phone service. Its features included paging, text messaging and a two-way radio feature (Nextel Direct Connect®) on a single handset. Announced on October 4, 2001, Nextel planned to upgrade its existing network with next-generation enhancements to double its voice capacity (via data compression) to enable the iDEN platform to remain competitive with other 3G 17 Industry Surveys, Telecommunications: Wireless, Standard & Poors, 1 Nov. 1 2001. 18 Wireless Week, "TDMA's Curious Road to 3G", 3 Dec. 2001. 19 Sprint PCS. 4 Dec. 2001 <littp://www.sprintpcs.com/aboutsprintpcs/Cdma_3g/ ›. 20 Industry Surveys, Telecommunications: Wireless, Standard & Poors, 1 Nov. 1 2001. 21 Wireless Week, "TDMA's Curious Road to 3G", 3 Dec. 2001. 22 Sprint PCS. 4 Dec. 2001 <http://www.sprintpcs.com/aboutsprintpcs/Cdma_3g/ >. 23 Wireless Factor. 4 Dec. 2001 <http://www.wirelessnewsfactor.com/perUstory/14367.html >. 10
    • • Sprint PCS: Winning the Wireless War? technologies. 24 As the only carrier using iDEN technology, Nextel alone carried the burden of supporting the Motorola standard in contrast to Qualcomm, whose many CDMA backers provided substantial revenue for technology development. Mobile Virtual Network Operators (MVNO) MVNOs were firms who contracted with major carriers to use their networks, while branding their own service. The MVNO phenomenon came to prominence in 1999, when Virgin Mobile (a subsidiary of Virgin) signed a deal with One 2 One ID resell their wireless service in the United Kingdom. Virgin Mobile quickly became the UK's fastest growing wireless provider, signing-up over 1 million subscribers in less than a year. 25 Other wireless carriers then began to consider similar deals to increase utilization of their networks. Sprint signed an MVNO deal with Virgin in October 2001, scheduled to rollout nationwide during the first half of 2002. Under the agreement, Virgin Mobile would initially focus marketing on the youth segment (15- 30 years old) where U.S. wireless penetration significantly lagged international markets. Other consumer marketing powerhouses such as MTV Networks and AOL Time Warner were rumored to be considering similar deals with other U.S. wireless carriers. Worldwide MVNO revenue was estimated to reach $1.lbn in 2002, and grow to $13bn by 2006. 26 However, some believed that by giving up some customer control to the MVNOs, network providers, such as Sprint PCS, may be relegated to providers of "dumb-pipes", similar to the fate of wireline network providers. Substitute Technologies In addition to direct cellular competitors, Sprint faced additional competition from substitute technologies. Two of the more prominent ones were wireless email devices, such as the RIM Blackberry, and Wireless Local Area Networks (WLANs). Both focused on data transmission, but with the advent of high-quality Voice over IP (VoIP), a technology that allowed voice calls over pure data networks, they were poised to become serious competitors in the voice arena. Research In Motion (RIM) Research in Motion's (RIM) Blackberry device was an always-on two-way pager that let users send and receive e-mail. By 2001 it had begun to reach large-scale adoption among enterprise users. Its subscriber base hit 164,000 in April 2001, compared with 120,000 during its previous quarter. 27 Between January 1999 and October 2001, RIM had shipped more than one million Blackberry devices. 28 Its adoption was due in part to its ability to send and receive email from corporate messaging systems, based on Microsoft Outlook. The Blackberry utilized packet- switched networks, enabling an "always-on" connection using old two-way paging networks. Next-generation devices were planned to be voice-driven and based on the GPRS protocol. In a sign of its growing global acceptance, RIM had signed deals with a number of European 24 Business Wire, "Nextel and Motorola Announce iDEN Technology Upgrade", 4, Oct. 2001. 25 Dan Briody, "Brand Power," Red Herring Nov. 2001: 54. 26 Ibid. 27 ZDNet. 10 Dec. 2001 <http://www.zdnet.com/zdnn/stories/news/0,4586,5081033,00.html >. 28 Marcelo Prince, "The Blackberry quickly became an indispensable tool for many professionals," Wall Street Journal 15 Oct. 2001: R20. 11
    • Sprint PCS: Winning the Wireless War? telecommunications firms and had plans to run on GSM within the EU. In November 2001, RIM announced a deal with VoiceStream, allowing VoiceStream to resell Blackberry devices that would run on VoiceStream's U.S. GSM/GPRS network. 29 On December 5, 2001, RIM announced a similar plan to launch GPRS -enabled Blackberry devices in an alliance with Telecom Italia. 3° In addition, it was expected that RIM would introduce devices that could run on CDMA networks. 31 Analysts forecast that these deals were precursors to RIM offering voice features on its devices. Satellite-Based Wireless Service Satellites had been used for wireless communication over the past few years. Service was rendered by low-earth orbit (LEO) satellites hundreds of miles above the Earth. A customer making a call using a satellite phone had their call routed through a gateway to the provider's satellites. Various satellites relayed the call amongst one another until a satellite with line-of- sight to the recipient's phone was located. The call was then conveyed to the recipient's phone. LEO satellites provided shorter connection times than higher, geosynchronous satellites (which hover thousands of miles above the Earth), and also required less power of the handset phone. GlobalStar and Iridium were the two main players in satellite wireless services. This technology targeted under-served markets where the large telecommunication players had not installed enough cellular towers for users to receive a signal. Both firms targeted industrial users such as the military, emergency services, and heavy construction. GlobalStar had 48 satellites that routed calls using CDMA technology at data rates up to 9.6 Kbps. At the end of November 2001, the firm had roughly 60,000 customers, an increase of 14% over the prior quarter. 32 Iridium had 66 satellites in its network. 33 Calls were made in the 1.6 GHz frequency range. Iridium phones used TDMA technology to route calls, and had transmission rates of approximately 2.4 Kbps. GlobalStar hoped to be cash-flow break-even in 2002. 34 Iridium was founded on a $5bn investment from Motorola, but was considered a major business failure and filed for bankruptcy in late 1999. Iridium was subsequently purchased for only $22M and shifted its focus from the consumer market to the niche government market. Iridium's troubled financial history led it to not publish sales figures, but they expected to be profitable by the end of 2002. 35 A major factor holding back adoption of satellite wireless telephony is pricing to the end-user. GlobalStar charged $119.95 for only 100 minutes of airtime, with each additional minute costing 29 Wireless Week, "RIM Strikes Strategic Deal", 5 Nov. 2001: 26. 30 ZDNet. 10 Dec. 2001 <http://www.zdnet.com/zdnn/stories/news/0,4586,5081033,00.html >. 31 Marcelo Prince, "The Blackberry quickly became an indispensable tool for many professionals," Wall Street Journal 15 Oct. 2001: R20. 32 GlobalStar. 10 Dec. 2001 <http://www.globalstar.com/satellite_constellation.html >. 33 Iridium. 10 Dec. 2001 <http://www.iridium.com/corphri_corp-understand.asp >. 34 GlobalStar Corporate Website. 10 Dec. 2001 <http://www.globalstar.com >. 35 TechTV News. 10 Dec. 2001 <http://www.techtv.cominews/culture/story/0,24195,3352821,00.html >. 12
    • Sprint PCS: Winning the Wireless War? • $1.39. Voicemail cost an extra $9.95/month 36 Iridium charged upwards of $3/minute, on top of subscription and equipment charges. 37 Wireless Local Area Networks (WLANs) The dominant technology in the WLAN space was based on the IEEE (Institute of Electrical and Electronics Engineering) 802.1 lb standard, commonly referred to as "Wi-Fi". Wi-Fi provided short distance wireless Internet access at a broadband speed of 11 Mbps. Wi-Fi was limited to a transmission distance of 100 meters, but the network could be easily extended with the addition of supplementary transmitters. Wi-Fi used the 2.4 GHz spectrum, which was unlicensed worldwide. This allowed anyone to set up a Wi-Fi network without having to obtain government approval. However, other wireless technologies such as Bluetooth, and consumer devices such as cordless phones, also utilized the 2.4 GHz spectrum, creating the possibility for interference. Wi-Fi equipment costs fell considerably in 2001, with some prices dropping up to 50%. Two variations of Wi-Fi were in the process of being developed with the intent to increase transmission capacity. IEEE 802.11a equipment began shipping in Fall 2001, and provided a data rate of 54 Mbps, although at a reduced range of 50 meters. Equipment costs for 802.11a were slightly higher than 802.11b, but were expected to fall at a comparable rate. Additionally, because 802.11a operated in the 5 GHz spectrum, the possibility for interference with other wireless devices was minimized. However, there were concerns about interoperability in countries such as Japan, which did not make the 5 GHz spectrum available for unlicensed use. In addition, a European standard called HiperLAN2 (High Performance Radio Local Area Network Type 2) was being developed for the 5 GHz spectrum, causing further incompatibility possibilities. Another variation, IEEE 802.11g, was being developed to extend the data transfer speed of 802.11b from 11Mbps to 22Mbps, while offering backward compatibility with 802.1 lb equipment. A draft IEEE standard for 802.11g was approved in December 2001, but 802.11g equipment was not expected to be available until at least Fall 2002. A summary table of WLAN technology can be found in Exhibit 7. The biggest technological concern with WLANs was security. Although technologies such as Wired Equivalent Privacy (WEP) and Virtual Private Networking (VPN) were being developed, they were shown to be open to hacking and as such raised concerns with enterprise IT managers. WLAN networks based on Wi-Fi technology were growing significantly in popularity, particularly in corporate and education arenas. Hardware manufacturers such as Dell and Apple had begun to integrate WLAN capability into their laptop PCs, and Microsoft had built-in support in their latest operating system, Windows XP. The main competitors in the 802.11 provider market were network operators such as Cisco, Wayport, and MobileStar. Wayport, MobileStar, WalkAbout Wireless, and other public wireless 36 GlobalStar Corporate Website. 10 Dec. 2001 <http://www.globalstar.com >. 37 Network Computing. 10 Dec. 2001 <http://www.networkcomputing.com/905/905f2side10.html >. • • 13
    • Sprint PCS: Winning the Wireless War? local-area solutions (PWLAS) began to implement WLANs in public places such as airports, hotels, and coffee shops. Wayport and MobileStar had received significant venture capital and boasted partnerships with companies such as Dell, Microsoft, Intel, and Starbucks. Initial adoption was slower than expected and MobileStar was forced to the brink of bankruptcy before being purchased by VoiceStream in November 2001. VoiceStream's purchase of MobileStar brought to light the possibility telecoms might consider WLANs as co-opetitors. Cisco also recognized the potential of WLANs and during the COMDEX 2001 show announced a major initiative to implement Wi-Fi networks in public places and homes. This plan complemented their year-old Mobile Office initiative, which as of November 2001 had installed WLAN technology in 1500 public spaces around the world. Cisco estimated the size of the market to be in the hundreds of thousands of locations, and saw the market for WLAN gear (currently $1.5bn) growing at about 50% annually. 38 The increasing pervasiveness of WLANs provided both the potential for competition and the potential for cooperative synergies with telecom providers such as Sprint PCS. Estimates showed that by 2003, there would be over 10 million users and more than 15,000 WLAN hotspots in the US. 39 Another study forecasted growth of WLAN hotspots from 6,300 in 2001 to over 114,000 worldwide by 2006. The same study also forecasted 95% of all laptops and PDAs would be WLAN enabled by 2006. 40 Similar to the cellular industry, the goal of WLAN providers such as Wayport, MobileStar, and Cisco was to build-out seamless coverage in urban areas across the world, enabling users to roam anywhere within the network without losing a connection. To facilitate this goal, companies such as Qualcomm, Ericsson, Nokia, and Mobilian were developing technologies to allow seamless connectivity between 802.11b, Bluetooth, and cellular networks. Wireless Applications In late 2001, the wireless industry faced formidable challenges. In mature markets, competition was stiff and the transition to new technologies raised questions regarding feasibility and return on investment. Barriers to entry were rising as consolidation made size and scope critical at a time when capital was drying up. Most telecommunication operators' balance sheets looked weak and over-leveraged. The amortization of capital expenditures just for wireless spectrum licenses was expected to severely impact net income for years. At the same time, competition was driving prices down, and the ARPU based on voice services was falling. Some analysts feared far more 3G licenses had been granted than some markets could support. Wireless operators were left with but one choice — find a 'killer application' that would allow them to leverage their networks and drive ARPU up. What did a busy professional expect fom a wireless service? Mobility — anyone, anytime, anywhere — and reliability were the top two concerns of business users. The introduction of pagers revolutionized the way professionals went about their jobs. With one-way paging 38 Frankel, Ben, and Stephen Wellman, "Cisco: Mobile Office Technology Will Grow Exponentially," The 802.11 Report 14 Nov. 2001:8. 39 Arena Intelligence Group. 40 BWCS, "Wireless LANs and the Threat to Mobile Revenue". 14
    • • • Sprint PCS: Winning the Wireless War? systems, people could send important messages to their counterparts irrespective of their location. With two-way messaging and mobile telephony, businesspeople could keep in touch continuously, unconstrained by wires. However, voice communications were fast becoming a commodity. Wireless service providers understood that growth in this area would be hard to come by. The key questions were then: Will businesses see value in data communications? If so, what were the key factors that would allow this value to be realized? While the debate on wireless standards and technology continued, the focus turned to applications. The wireless value discovery process elicited mixed opinions among analysts and business executives. Speaking at the 2001 Cyberposium on the wireless landscape, David Berndt, Director for wireless and mobile technologies at the high-tech market research firm Yankee Group noted, 41 "The Killer App is voice. Ninety-eight percent of [wireless] traffic will be voice over the next five years." In return, NTT DoCoMo's Executive Director for Gateway Business, Takeshi Natsuno, asked rhetorically, "Are 19 million people just buying this cell phone to download Mickey Mouse? I don't think so... We don't need a killer app because we have a killer environment! " mCommerce Applications mCommerce is broadly defined as providing mobile consumers and businesses with the ability to purchase and receive products and services via wireless channels. The vision for mobile commerce was to provide information and transaction processing tools that fully exploited the unique attributes of mobile technology — personal, anytime, anywhere, and location-aware. The first of the mCommerce applications originated in the 1996/1997 timeframe, with the financial services industry leading the way. Mobile commerce applications were estimated to generate revenues in the range of $64.4bn to $210.8bn by 2005. 4 NTT DoCoMo's i-mode service was the largest mCommerce application success story. (Exhibit 3). In 2001, four types of mCommerce applications - payments, location-based marketing and directory services, comparative offline shopping, and gaming and gambling — had gained recognition. These applications were forecast as possible means to drive mass consumer adoption. One initial application, downloadable ring-tones, generated US$300M in Japan in year 2000 alone. 43 Exhibit 9 provides more information on the mCommerce market drivers. Telematics Applications One intriguing segment for cellular operators, infrastructure providers, content providers, and consumers was telematics — the convergence of telecommunications with the automobile. 41 George A. Chidi, Network World, Feb. 12 2001, "Wireless killer app may be better service". 42 Reuter's Business Insight Report, Nov. 2000. 43 Rothschild, Dave, Wireless Week, 5 Nov. 2001, "Guest Opinion", 37. 15
    • Sprint PCS: Winning the Wireless War? Telematics was broadly defined as mobile services delivered via wireless technology to in- vehicle devices. Telematics represented a niche application of wireless t chnology, and was believed to be a 'killer app' bringing together the automotive and telecommunication industries. The creation of Wingcast by Ford Motor Company and Qualcomm, and the aggressive rollout of OnStar by General Motors, refocused attention on vehicle telematics in the U.S. Telematics services fell into three main categories: Safety & Security, Navigation & Information, and Entertainment. Safety & security services were expected to provide key buy-ins for telematics, and voice communications was expected to drive customer value. According to Forrester Research, telematics was expected to be a $20bn market by 2006. 44 Exhibit 10 further details the telematics market drivers and inhibitors. The Opportunity for Wireless Data By 2001, numerous applications for wireless data had been identified. The mobile workforce had a need to stay in touch while traveling. Many saw a need to provide navigation and data communication capabilities in the car. Marketers saw wireless as a new channel that would allow consumers to purchase airline tickets, news, and other information services while connected wirelessly. Wireless carriers had the unique opportunity to consolidate all billing services for mCommerce onto a single monthly bill. Location-sensitive applications could also provide value to customers by pinpointing one's location and providing information on the nearest hotels, restaurants, and retailers. SMS and e-mail were among the most popular immediately available applications for mobile phones. In spite of all these applications, forecasts for the wireless data market remained questionable. Current data transmission rates were slow compared to high-speed home and office connections. Were businesses and consumers willing to pay to be connected all the time if they had convenient access at their desks? The number of U.S. wireless data subscribers was forecast to increase to 52 million by 2005 45 (Exhibit 11), and mCommerce revenues were forecasted to grow from only $2M in 2000 to over $2bn in 2005 46. But forecasts for wireless data services, once predicted to quickly reach tens of billions of dollars, had dropped. The most recent projections showed demand reaching less than $5bn by 2004 47 (Exhibit 11). 48 Sprint PCS Approach Sprint PCS rested squarely in the CDMA2000 camp, along with Verizon. They had adhered to the CDMA standard, and would therefore be able to leverage their existing network infrastructure in the years ahead. Backward compatibility was another advantage of Sprint PCS versus their TDMA-based competition (AT&T Wireless and Cingular, among others). 44 The Forrester Report, "Voice Drives Telematics Boom," Forrester, June 2001. 45 "In-Stat Market Snapshot," Wireless Week, 5 Nov. 2001: 24. 46 Chris Hayward, Reuters Business Insight Technology, "Outlook for mCommerce: Technologies and Applications to 2005," 2000. 47 InfoTech Trends, Gartner Group, Dec 11, 2000. 48 Cahners In-Stat Group, Wireless Week, 5 Nov. 2001: 24. 16
    • • Sprint PCS: Winning the Wireless War? Sprint PCS had recently bid $280M in an FCC auction, compared to Verizon's $4bn, just for the rights to New York City. Their "spectral thriftiness" was a direct result of their dedication to CDMA. Sprint PCS claimed they would not require additional investments in spectrum in order to achieve 3G upgrades on their wireless data network. In late 2001, the company was upgrading its network to CDMA2000 lx at an expected cost of about $1bn. This upgrade increased spectral efficiency by another 25% and provided average data rates of 40-60 Kbps. The upgrade was expected to be completed in late 2002. Another upgrade was likely to follow. The subsequent, more significant upgrade to CDMA2000 1 x-EV would cost in the neighborhood of $6bn. This upgrade would provide maximum data rates of over 2 Mbps. Next Steps As Ravi looked out his window, he pondered what this dynamic marketplace held in store for its numerous players. Which company would hold market power in the evolving wireless Internet landscape? What would be the impact of the FCC auctions? How would Sprint PCS respond to WLAN, satellite, not to mention other cellular competitors? What would be Sprint PCS' competitive advantage? How quickly would data services reach mainstream adoption? What did the cellular standards war foretell? Could Sprint PCS and their competitors generate positive ROIs on their planned 3G network upgrades? And what about the international impact of these answers? Ravi turned to his papers, and began his research. • • 17
    • U.S. Wireless Subscriber Growth 2 0•_ 2 121.3140 109.5 120 86 100 69.2 80 44 55.3 60 24.1 33.8 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 (1850-1990 MHz) Digital Satellite Service (38.6.40 GHz) Cellular 800-900 MHz Broadcast TV AMPS, CDPD, DAMPS, VHF (54-88, 174-216 MHz TDMA, GSM, CDMA UHF (470-806 MHz) -mosis Wi-Fi, Bluetooth (2.4 GHz) PCS 1800-1900 MHz CDMA, TDMA, GSM WCDMA, HiperLAN2, 802.11a 5 GHZ Digital TV (174-216,470-806 MHz) Teledesic Digital Satellite Service (18.8-19.3, 28.6-29.1 GHz) AM/FM Radio Analog Cellular (535-1.605 KHz, 88-108 MHz) (806-902 MHz) 2G PCS Wireless Fixed Wireless Digital Broadband Satellite) (27.5-29.5, 31-31.3 GHz) Sprint PCS: Winning the Wireless War? Exhibit 1— Growth of the U.S. Wireless Market Source: Industry Surveys, Telecommunications: Wireless, Standard & Poors, Page 1, Nov. 1, 2001 Exhibit 2 — Wireless Spectrum Allocation in the United States Wireless Spectrum Allocation Sources: eCompany.corn, National Telecommunications and Information Administration 18
    • • • • Sprint PCS: Winning the Wireless War? Exhibit 3 - Glossary of Terms 1G: First Generation wireless protocol. A standard system for analog telecommunications in the United States (see AMPS). Introduced by AT&T in 1983, AMPS was still the most widely used system in the U.S. in year 2000. 2G: Second Generation wireless standards. Divided the wireless spectrum to increase available capacity in limited bandwidth. These technologies include CDMA, GSM, and TDMA. 2.5G: Second-and-a-half Generation wireless standards. Although there is no formal definition for what defines 2.5G technology, 2.5G increases data rates to speeds up to 114 Kbps. 2.5G technologies include GPRS, CDMA2000 lx, and HSCSD. 3G: Third Generation. A series of standards designed to significantly increase the speed of wireless data links. 3G Technologies include EDGE, CDMA2000 1xEV and WCDMA. bps: Bits per second. Used to describe data transfer speeds. Higher bps implies faster transfer. AMPS: Advanced Mobile Phone Service. The foundation of the US cellular industry and the standard on which the first generation of wireless networks is based. Analog: The traditional method of modulating radio signals so they can carry information. Amplitude modulation (AM) and frequency modulation (FM) are the two most common methods. Bluetooth: A short-range (30 feet or less) wireless technology operating in the 2.4 GHz spectrum. Offers data transmission speeds up to 2Mbps. Designed to provide wireless communication between any electronic devices. Shows much promise as a technology to eliminate wires between computing and other consumer devices. CDMA: Code Division Multiple Access. Sends multiple digitized signals, each tagged with a unique code. The data is scattered across the frequency band. The receiving device is instructed to decipher only the data corresponding to a particular code to reconstruct the signal. CDMA significantly increases the amount of data that can be sent in a given frequency range and is considered technologically superior to TDMA and GSM. CDPD: CDPD (Cellular Digital Packet Data) is a 2G technology that allows users to access the Internet at up to 19.2 Kbps. It was the first widely deployed digital network, and although it had poor data rates, it was used by many police departments, freight companies. CDPD functions in the 800 MHz spectrum. Cdma2000: Commercial name for the version of 3G CDMA based on 2G CDMA (IS- 95/cdmaOne). A high-speed version of CDMA compatible with existing CDMA networks. Expected to be the 3G technology of choice for all 2G CDMA operators in the US (Sprint, Verizon), Japan, and South Korea. Offers superior efficiency and call quality when compared to GSM. 19
    • Sprint PCS: Winning the Wireless War? EDGE: Enhanced Data Rate for Global (or GSM) Evolution. Uses enhanced TDMA technology to achieve 3G data transmission speeds. Is compatible with both GSM and US TDMA networks. Likely to be widely used in the US, as it is the only option for TDMA operators to achieve high-speed data transmission capability. GHz: Gigahertz 1,000,000,000 hertz (see Hz). GPRS: General Packet Radio Service. Boosts wireless data transmission over GSM networks by up to 10 times. Boasts theoretical speeds up to 171.2 Kbps. Offers "always-on" capability. European carriers are upgrading their networks to this 2.5G (second generation and a half) technology. GSM: Global System for Mobile Communications. A standard based on TDMA technology. Widely established in Europe and together with CDMA and TDMA, represents the second generation of wireless networks. Hz: Hertz. A unit of frequency equal to one cycle per second. HiperLAN2: High Performance Radio Local Area Network Type 2. Standard for high speed WLAN being developed by the European Telecommunications Standardization Institute (ETSI). Operates in the 5GHz band and claims data transfer speeds up to 54 Mbps. HSCSD: High-speed circuit-switched data. 2.5G technology which utilizes a circuit-switched protocol and has data rates up to 38.4 Kbps. i-Mode: Japanese phone company NTT DoCoMo's wireless network technology which transmits data at 9600bps. Offers "always-on" capability and its packet-switching technology allows NTT DoCoMo to charge users based on data transmitted versus time spent on-line. Highly popular in Japan, attracting over 17 million users from 1999-2000. NTT DoCoMo has purchased an interest in AT&T Wireless and there is speculation of plans to implement i-mode service in the U.S. Kbps: Kilobits per second. 1,000 bits per second (see bps). KHz: Kilohertz. 1,000 hertz (see Hz). Mbps: Megabits per second. 1,000,000 bits per second (see bps). MHz: Megahertz. 1,000,000 hertz (see Hz). TDMA: Time Division Multiple Access. Divides available spectrum into narrow frequency bands and each second into individual time slots. An individual transmission uses one of the time slots for each second in one of the frequency bands. Offers significantly more transmission capacity for a given frequency than analog cellular. Used mostly in the U.S. by operators such as AT&T Wireless and Cingular. 20
    • • • Sprint PCS: Winning the Wireless War? TD-SCDMA: Co-developed by Siemens AG and the China Academy of Telecommunications Technology and scheduled to be deployed in China as a global standard in 2002. Suitable for time division duplex (TDD) bands and some TDMA operators are considering it as an option for migrating to 3G. It is competing with WCDMA to be the standard for GSM operators to migrate to 3G. UMTS: Universal Mobile Telecommunications System. An overarching standard based on WCDMA, but also includes technologies for individual uses. Currently restricted to Europe, where it originated. Not expected to be fully compatible with the Japanese version of WCDMA. Promises 2Mbps transmission speeds with global roaming and other advanced capabilities. WAP: Wireless Application Protocol. A set of wireless standards that strips webpages of all but graphics for display on small screens, such as mobile phones. Technology has not caught on due to consumer frustration with slow speeds and non- intuitive devices, such as typing using a 12- digit mobile phone keypad. In addition, website providers must develop mirror sites to enable viewing on WAP devices. WCDMA: Wideband CDMA. A high-speed (3G) version of CDMA, based on the original Qualcomm CDMA technology, but significantly modified by Japanese and European manufacturers. A majority of the GSM operators will utilize WCDMA as their technology of choice to upgrade their networks to 3G. Wi-Fi: Wireless Fidelity. A technology to provide a wireless local area network (WLAN) based in the IEEE 802.11b standard. Offers data transmission speeds up to 11Mbps over distances up to 100m. See Exhibit 7 for more detail. Analog vs. Digital: Analog technologies refer to transmission accomplished by adding signals of a varying frequency or amplitude to existing waves of a given frequency. Digital technologies describe electronic technologies that generate and store data in two states: positive & non- positive. Positive is expressed by 1's and non-positive by 0's. Each of these state digits is referred to as a bit (and strings of bits are known as bytes). Packet-switched vs. Circuit-switched: Circuit-switched is a type of network in which a physical path is obtained for and dedicated to a single connection between two end-points in the network for the duration of the connection. Ordinary voice phone service is circuit-switched. The telephone company reserves a specific physical path to the number you are calling for the duration of your call. During that time, no one else can use the physical lines involved. For the duration of the connection, all resources on that circuit are unavailable for other users. Most phone systems today are circuit-switched. Packet-switched describes the type of network in which relatively small units of data called packets are routed through a network based on the destination address contained within each packet. Breaking communication down into packets allows the same data path to be shared among many users in the network. This type of communication between sender and receiver is • 21
    • Sprint PCS: Winning the Wireless War? known as connectionless (rather than dedicated). Most traffic over the Internet uses packet switching and the Internet is basically a connectionless network. i-Mode vs. WAP: In contrast to the protocols described above, iMode & WAP represent different items altogether. WAP is a specification for presenting and interacting with information on other wireless devices. It consists of many layers (physical and software) and helps present this information to the user in a 'friendly' way. i-Mode is not only a protocol, as WAP is, but is a full wireless Internet service. A more valid comparison would be between WAP and cHTML, or programming languages such as XML and WML. Always-on: This refers to accessing the Internet in such a way so as to never be disconnected from it. A wired analogy would be DSL lines in homes — GPRS is one of the first wireless protocols to allow this for wireless users. Source: Business 2.0, October 24, 2000, p. 88. Business 2.0, March 6, 2001, p. 76. 22
    • 150 100 50 1516 3 c1 • Sprint PCS: Winning the Wireless War? Exhibit 4 — Growth of Wireless Technologies in the U.S. Market 100 93 8as 80 E 70 .6 60 50 40 3D 20 10 0 --•- AM PS COMA T DMA GSM 1999 2000 Source: IDC, 2001. Exhibit 5 — North American Wireless Data Forecast • cdnuianei cdrna2C00 TDMArEDGE 3842ACO 307 14_4 g 192 MIA 120 12$ 57.6 192 0 58 8 3 8 Source: <http://www.airprime.com/html/CDMA_White_Paper.PDF >. • 23
    • Sprint PCS: Winning the Wireless War? Exhibit 6 - Organizations and Agencies Involved in 3G Transition Effort Source: <http://florin.stanford.edu/-1361/Fa112000/Dongwan/IMT2000.htm >. Exhibit 7 - Overview of Wireless LAN Technologies Band IEEE 802.11 ETSI HiperLAN2 5 GHz HiperLAN2 2.4 GHz 5 GHz Standard 802.11b 802.11g 802.11a Available spectrum 83.5 MHz 83.5 MHz 300 MHz Max data rate 11 Mbps 22 Mbps 54 Mbps 54 Mbps Throughput 5-7 Mbps 10-11 Mbps 31 Mbps 20 Mbps Range / corresponding data rate 100 m / 11 Mbps 100 m / 11 Mbps 50 m / 9 Mbps 150 m / 16 Mbps Shipping Now Fall 2002 Winter 2001 Winter 2001 Sources: Benjamin Frankel, Fierce Wireless Intelligence Units, August 2001. Martin Johnsson, "HiperLAN2 - The Broadband Radio Transmission", 1999. Brad Smith, "Another Standard in the Wind," Wireless Week, 16 July 2001. 24
    • • Sprint PCS: Winning the Wireless War? Exhibit 8— Major U.S. Wireless Telecommunications Firms CARRIER Sprint PCS AT&T AMPS 800, TDMA 1900 Verizon AMPS 800, CDMA 800, CDMA 1900 Cingular AMPS 800, TDMA 800, TDMA 1900, GSM 1900 Nextel iDEN 800Technology CDMA 1900 Number of Subscribers 11.8M 16.4M 27.9M 21.2M 7.7M Market Share 11.2% 16.4% 27.9% 21.2% 7.7% ARPU $61.00 $63.80 $49.00 $52.38 $72.00 3Q01 Revenue $2.3B $3.4B $4.4B $3.6B $2.0B Source: Standard & Poor's, Telecommunications: Wireless, 1 Nov. 2001: 4. • 25
    • Sprint PCS: Winning the Wireless War? Exhibit 9 - mCommerce Market Drivers and Inhibitors MARKET DRIVERS MARKET INHIBITORS • Network service providers invested billions in third generation technologies and hence were expected to act as natural drivers. • Threats to mCommerce stemmed from the fact that the technological infrastructure could not support the experience rich • The key business value behind promises of mCommerce applications. technologies like Internet access was the reduction in costs of serving a customer with the self-service concept. There was a huge cost reduction potential associated with real estate costs, call center costs and associated transaction costs. • A viable business model for mCommerce applications didn't seemed to exist. The stereotypical B2C Internet approach had been proven flawed. DoCoMo's model of charging a small commission on content provided seemed to be the only tested • Another significant value was in the idea alternative. of having a direct communications channel to the customer. This channel was value- added with the location-aware capability of wireless devices. • Wireless security was still largely a question mark. There was a huge psychological barrier in convincing customers about secure wireless transactions. Source: Reuter's Business Insight Report, Nov. 2000. Exhibit 10 - Telematics Market Drivers and Inhibitors MARKET DRIVERS MARKET INHIBITORS • Consumers saw safety & security features as important. With caretakers pre-installing telematics devices, adoption was expected to occur. For instance, OnStar was standard on 32 of GM's 54 models sold in the US, and as of June 2001 it served 1 million customers. • • The cost of installed hardware was $600 per vehicle in 2001. With millions of cars manufactured each year in the US, this cost was expected to have significant bottom- line impact on car manufacturers. The digital coverage required for advanced services was limited within the US, and to • Mega deals between car manufacturers and wireless carriers were likely to speed telematics development. In August 2001, AT&T Wireless and DaimlerChrysler provide full-service capabilities, car manufacturers needed to bear additional costs, estimated at $100 per vehicle, for dual-band systems. (DCX) signed an agreement that would allow DCX to expand its telematics services beyond its luxury models. • There were regulatory and litigation issues associated with in-vehicle services (stemming from the assumption these • It is estimated that 84 million people drove to work alone daily in the US, and on average listened to four hours of radio a week. This entertainment-deprived segment was a good opportunity for niche entertainment services. service would distract drivers' attention from the road.) Source: The Forrester Report, "Voice Drives Telematics Boom," Forrester, June 2001. 26
    • U.S. Wireless Data Services Revenue Forecasts $6,000 $5,000 $4,000 69. 2 $3,000 IX $2,000 $1,000 S- 2000 2001 2002 2003 2004 Sprint PCS: Winning the Wireless War? Exhibit 11 — U.S. Wireless Data Subscriber Forecast 60 50 40 = 30 20 10 0 2000 2001 2002 2003 2004 2005 Source: Cahners In-Stat Group, Wireless Week, 5 November 2001, 24. Exhibit 12 — U.S. Wireless Data Services Revenue Forecasts Source: Info Tech trends, Gartner Group, 11 Dec. 2000. 27
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