Straight talk from Forbes Magazine

 

Cell phone plans, A quick introduction

Cell Phone Plans, a longer introduction

Just what do all these abbreviations mean?

Cell Phone Plans, corporate and global customers

Straight talk from Forbes Magazine -- know what you're getting

A vote for VoiceStream and some excellent buying information

 

Cellular radio is wonderful technology but it isn't perfect nor can it be perfected; it will never have the stability of a wired telephone network. It is reasonable to expect that cellular service will get better as each year passes but in many places this isn't happening. Yet cellular remains indispensable and we can't go back to C.B. radio or old style mobile telephones. The article below is a good if gritty account of the cellular landscape today. Don't get discouraged, many of the new features are just plain fun. Tom Farley

Straight talk from Forbes Magazine

A Call for Help

by Scott Woolley, Forbes Magazine (external link), 09.17.01 (All rights reserved)

The cell phone industry bleeds red ink and provides crummy call quality. But with the feds about to get out of the way, all that could change.

Oklahoma should be a cell phone paradise. Its pancake-flat plains carry signals well. The sparse population keeps the airwaves uncrowded. And competition abounds--13 companies vie for customers in the state; only Texas has more. So why is cellular service so bad for Dan Kesler, a semiretired millwright who lives on the outskirts of Oklahoma City? Frustrated with the local Bell's wireless coverage, he switched to AT&T looking for clearer calls. Still not satisfied, he then tried Sprint, and it sounded better--but to get a signal he often had to climb atop his wellhouse roof. Now Kesler is on his fourth carrier, VoiceStream. So far it's the best of the bunch, but too often his calls fade out. "At least I can talk from indoors," he says.

Oklahoma, like much of the cellular nation, suffers from an oddity of economics: too much competition. A confluence of factors--chiefly a deluge of new users and ill-advised government meddling--has conspired to create a business that is infamous for shoddy service, poor coverage and outright hostility toward its own customers.

Most cities have room for three, maybe four, competing carriers, and that is how many serve overseas markets such as Japan and almost every European country. In the U.S. six national carriers compete for business, and many regions have a seventh or eighth choice, each with patchy coverage by foreign standards. This was the way the Federal Communications Commission wanted things to be when it cracked open the cellular business to new competitors in 1994. Since then rates have fallen 72%, attracting 120 million American customers. Calls now cost an average of 16 cents per minute in the U.S., 30% less than in Europe and 60% less than in Japan, according to Merrill Lynch. At these prices people can afford to talk, and they do. Americans gab on their phones for over five hours a month, twice as much as Europeans. So clogged is the worst U.S. network that it drops 7% of calls within just two minutes, according to Telephia, a research firm that conducts independent tests. The national average is 2.1%, meaning a ten-minute call has roughly a 10% chance of cutting out.

The effects of so much competition have also been ruinous for U.S. carriers. The six national providers--AT&T, Sprint, Verizon, Cingular, Nextel and VoiceStream--together ran up $3.5 billion in losses last year. U.S. carriers' operating income (earnings before interest, taxes and depreciation) averages 22% of revenue, barely half the profit margin enjoyed by most of their overseas peers. Wall Street's reaction has been brutal: AT&T Wireless, Sprint and Nextel have shed $78 billion in market value in the past year, while Cingular and Verizon Wireless have had to shelve their plans for initial public offerings.

"The U.S. industry is a freak of nature, an artificial creation with more competitors than the economic reality justifies," argues Scott Ford, president of Arkansas-based Alltel, the largest regional cell phone company. "It's the biggest issue facing the industry. We are rapidly moving from wealth creation to wealth destruction."

What's needed is a wrenching, top-to-bottom consolidation--and it is coming soon, thanks to the unlikeliest of saviors: the FCC. By year-end the FCC is expected to eliminate, or at least loosen, restrictions that have effectively banned large-scale consolidation. The most important restriction is the cap on how much radio-wave spectrum a single cellular firm can control in a given city; another rule bans cross-ownership of certain types of cellular licenses. Together the regulations effectively guarantee fragmented, unprofitable markets.

If the FCC acts as expected under new Chairman Michael Powell, the antiregulator regulator, all hell will break loose in the wireless world. New opportunities for investors betting on the takeover game will spring up, (see chart). Customers will have to choose from a new lineup of merger titans. (For advice on picking the right service now, see "Ranking the Top Carriers".)

Ever so quickly, the six national carriers will shrink to three or four, predicts Blair Levin, an analyst with Legg Mason, who was the chief of staff to then-FCC chairman Reed Hundt. Some early handicapping: The two biggest, hottest properties may be AT&T Wireless, spun off from its Ma in July, and Sprint; the two most aggressive bidders could be two Bell amalgams, Verizon (Bell Atlantic + Nynex + GTE + AirTouch) and Cingular (SBC Communications + BellSouth).

Sprint and Verizon make perhaps the prettiest pair. Both use the CDMA format (code division multiple access); Verizon has 28 million customers but not enough spectrum to serve them, while Sprint has 13 million customers and airwave rights to spare. Foreign phone companies are the wild card in the wireless match game. In June Deutsche Telekom completed its $28 billion acquisition of VoiceStream, with all of 6 million subscribers. Vodafone, based in the U.K., owns 45% of Verizon Wireless. Japan's NTT DoCoMo spent $10 billion for a 16% stake in AT&T Wireless earlier this year. A dozen or so large regional carriers could also be up for grabs. AT&T itself is likely to bid for Western Wireless and Dobson Communications, two publicly held regionals.

Such deals could save carriers billions of dollars in operating and cell tower costs and improve service at the same time. AT&T was first to eliminate nationwide roaming fees, agreeing to cover the cost when its customers travel elsewhere and make calls on regional carriers' networks. It's a huge headache. AT&T, with cellular revenue of $10.5 billion last year, paid over $1.4 billion in roaming charges.

The quality of the roaming calls is often frequently lousy, but AT&T has no control over its partners' networks. Often its customers can't tap into the services that are supposed to be available nationwide, such as automatic notification of voice mail. The result is a profit drain and less customer satisfaction, damaging the AT&T brand. If AT&T is freed to acquire its roaming partners outright and integrate their networks into its own, those roaming conflicts should disappear.

To be sure, even if the caps are lifted, blanketing a giant country like the U.S. with cell coverage will never be as easy or cheap as covering Europe. Germany, for instance, has eight times the number of people per square mile. European countries typically license about 320MHz, much more than the 190MHz available in the U.S. (The conventional explanation for superior European quality--that wise European governments mandated a single standard, while the unregulated U.S. was foolishly fragmented among four technologies--is essentially a canard. Sprint and Verizon both use CDMA technology, for instance, but that doesn't do their users any good, since both companies block each other's subscribers from roaming onto their digital networks.)

The quality of the roaming calls is often frequently lousy, but AT&T has no control over its partners' networks. Often its customers can't tap into the services that are supposed to be available nationwide, such as automatic notification of voice mail. The result is a profit drain and less customer satisfaction, damaging the AT&T brand. If AT&T is freed to acquire its roaming partners outright and integrate their networks into its own, those roaming conflicts should disappear.

To be sure, even if the caps are lifted, blanketing a giant country like the U.S. with cell coverage will never be as easy or cheap as covering Europe. Germany, for instance, has eight times the number of people per square mile. European countries typically license about 320MHz, much more than the 190MHz available in the U.S. (The conventional explanation for superior European quality--that wise European governments mandated a single standard, while the unregulated U.S. was foolishly fragmented among four technologies--is essentially a canard. Sprint and Verizon both use CDMA technology, for instance, but that doesn't do their users any good, since both companies block each other's subscribers from roaming onto their digital networks.)

Allowing market forces to shape the cell phone industry will be a first for the FCC. In the 1980s, as the wireless industry was just starting up, the FCC artificially limited service to a duopoly in each market, typically the local phone company and one outsider. Per-minute rates actually rose in the early 1990s. In 1994 the FCC took the shackles off--and imposed rules that just as artificially boosted how many rivals could enter a market.

The FCC did this intentionally by slapping such a strict ownership limit on radio-wave spectrum that, conceivably, eight rivals could grab equal chunks of the airspace in a particular city--but none of them could combine. It is akin to trying to promote competition in the auto industry by limiting the tons of steel any one company can buy, says Jagdish Sheth, an economist at Emory University who has studied the effects of the spectrum cap.

The FCC has long "had something of an obsession" with getting the "right" number of competitors in the market, says Harold Furchtgott-Roth, an FCC commissioner from 1997 until May of this year and now a visiting Fellow at the American Enterprise Institute. "But no one in government knows what the right answer is, and if they think they do, they're delusional. Even asking the question smacks of an industrial policy."

For the biggest cell companies, relief can't come soon enough. The growth in customer rolls (to 133 million by year-end) and the amount of time the average user spends on the phone (growing 38% annually) mean that capacity has to increase 75% a year to keep pace. New cell towers are only being added fast enough to handle one-third as much growth, which is a big reason why millions of users endure dropped calls and infuriating fast-busy signals.

Carriers are improvising ways to cram more calls into their allotted spectrum. The cheapest option has been to shift people to digital phones, which use anywhere between a tenth and a third as much spectrum as old analog technology. AT&T managed to reduce the percentage of subscribers using analog phones from 21% at the end of 1999 to just 7% as of June 30.

Next they are lowering cell phone tower antennas and tweaking power output to reduce interference between cells, thereby increasing capacity. And they deploy a very effective--and very expensive--option known as "cell-splitting," building redundant cell towers in areas where they have long had coverage. But each new site costs about $300,000, and stiff resistance to new towers makes it hard to find acceptable spots, especially in urban areas--where they are needed most.

"We have split cell sites virtually everywhere possible in our major cities," says Denny F. Strigl, the chief executive of Verizon Wireless. "We have put a cell tower on every corner we can find in the island of Manhattan. We're running out of makeshift solutions."

Other solutions? Carriers can delay new data services that gobble capacity, or simply limit subscriber growth and cede market share. They are unwilling to do that.

Cell phone plans, A quick introduction

Cell Phone Plans, a longer introduction

Just what do all these abbreviations mean?

Cell Phone Plans, corporate and global customers

Straight talk from Forbes Magazine -- know what you're getting

A vote for VoiceStream and some excellent buying information

 

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