Wireless technologies are critical to introducing true competition into the country’s last bastion of telecommunications monopoly, according to market research by Action Information Services. Unlike today’s analog cellular services that merely supplement traditional wireline service, new digital cellular and personal communications services will begin to supplant wireline service within a few years. By bringing local exchange competition to the mass market, wireless will be a powerful catalyst speeding legislative reforms and industry restructuring.

Of course, local exchange competition isn’t a new concept. For 10 years competitive access providers have fought to establish local competition by providing fiber connections to high-volume telecommunications users in metropolitan areas. Yet CAPs still carry less than one percent of total local exchange traffic. This slow progress is mainly due to the formidable entry barrier imposed by the huge capital investment needed to duplicate the wireline network. Local exchange carriers spend billions of dollars each year simply to maintain their extensive networks.

Wider local exchange competition now is becoming feasible because wireless systems for local service, though costly, are much less expensive than duplicating the wireline network. With the addition of PCS, wireless systems will gain enough capacity to handle a major portion of the local traffic now carried on wireline networks. The total spectrum allocated for broadband PCS is nearly two-and-a-half times the amount currently used by the entire cellular industry. What’s more, new digital technologies will enable cellular and PCS systems to carry many more calls per unit of spectrum.

In the past, capacity constraints meant that cellular operators had little incentive to lower prices. These limitations will soon disappear. Look for PCS providers to adopt fairly aggressive pricing strategies to attract the customers they need to fill their huge capacity and to recover their substantial capital investments. PCS licensees will have both the ability and the need to serve the mass market. Forced to respond, cellular operators will lower their prices within PCS coverage areas. This will narrow the large gap between wireline and wireless usage costs.

Even so, wireline will remain the least costly two-way voice service for many years. It’s not that people will abandon wireline to get lower phone rates. Rather, a portion of those who buy wireless services will conclude that the added expense of wireline service is not justified. Why pay for both if you can get reliable wireless service at a reasonable cost? Survey research suggests that nearly one-third of PCS and cellular subscribers may be willing to forgo wireline telephony.

But low prices alone won’t encourage large numbers of customers to abandon wireline networks. Wireless network reliability, and to a lesser extent, speech quality, also must approach that of the wireline network. Once digital cellular and PCS achieve comparable reliability, some users will view wireline as an avoidable expense. If consumers can have reliable wireless service for, say, $40 per month and thereby avoid paying $25 per month for wireline service, they get the added value of portability for only $15 per month. This is an easy sale, and AIS expects wireless networks to achieve reliability comparable to wireline within five years.

Moreover, the added value of wireless mobility can be used to motivate customers to switch. Since the cost of wireline will remain lower, differential features will be needed to overcome the natural inertia of consumers. The success of cellular and cordless phones demonstrates the enormous popularity of mobility among a broad segment of potential users. Digital cellular and PCS can be used to target cordless phone users with the added benefit of letting subscribers use phones across a much larger geographic area.

Although wide-area mobile calls will remain relatively expensive, wireless providers can introduce flexible pricing plans for PCS and digital cellular that permit unlimited calling in home cells and during off-peak time periods. Since there will be plenty of excess network capacity in the evenings and on weekends, such plans have low incremental operating costs. In the United Kingdom, wireless operator Mercury One 2 One already offers a service option with free calls in the evenings and on weekends.

But for this approach to succeed, important practical issues of interconnection to the public switched telephone network and associated access fees must be resolved. The hefty per-minute fees that cellular operators now pay for calls routed through LEC networks preclude flat rate pricing. Reciprocal compensation on a co-carrier basis also will be needed. With this arrangement, LECs would pay comparable access fees for calls routed through the networks of wireless competitors. Though not strictly necessary, number portability would speed the migration from wireline networks. This would let subscribers retain their phone numbers when changing carriers or service types.

Wireless technology also might be used to target the local loop market directly. Potential PCS air interface standards have been grouped into high-tier (vehicular hand-off) and low-tier (pedestrian) categories. Although low-tier technologies can’t be used while driving at high speeds, they offer near-wireline voice quality and are cheaper to deploy and maintain than traditional copper plant. However, it would be extremely difficult and costly to compete directly with established local exchange carriers for the local loop business. Pedestrian portability might not be enough of a differential advantage to overcome customers’ inertia.

On the other hand, some local exchange carriers may deploy wireless loops to save on maintenance expenses. Customers would get a high-quality, longer-range cordless phone for home use. Some LECs may use low-tier PCS to help defend their wireline customer base against incursions by cellular and vehicular PCS. But don’t expect to see low-tier technologies implemented throughout metropolitan areas. Even in pedestrian-oriented cities like New York, customers will want to use their portable phones in taxis and on subways.

Regardless of the exact mix of capabilities that the new wireless networks offer, the competitive dynamic they bring already is profoundly affecting the structure of the telecommunications industry. PCS auctions spurred alliances that would have been hard to imagine a few years ago. Cable television rivals have joined forces with the third largest long-distance company to form the Sprint Telecommunications Venture. In the initial PCS auction, this group acquired the lion’s share of the licenses. Moreover, the Sprint consortium has specifically targeted the $90 billion local loop market. Combined local and long-distance phone services will be marketed by various cable television companies under the familiar Sprint brand. This approach will lend needed credibility to cable operators seeking to market telecommunications services.

Long-distance giant AT&T Corp. also has seized the tremendous wireless opportunity. AT&T invested more than $19 billion to acquire the United States’ leading cellular operator, McCaw Cellular Communications, and to amass PCS licenses throughout the country. More recently, AT&T announced that it will divest its large and profitable equipment business in order to aggressively compete for the local phone service market. Because of its unmatched financial and technical resources and well-regarded brand name, AT&T’s moves have sent shock waves through the board rooms of LECs. They know the AT&T brand will give many consumers the confidence to use wireless technology for their primary local phone service.

Meanwhile, MCI Communications Corp. has acquired a cellular reseller for $190 million and announced plans to expand wireless resale capability nationwide by cutting deals with cellular and PCS network operators. MCI also is inve
sting hundreds of millions of dollars in local fiber networks and switching systems in several cities. Though high-volume business customers are the initial target of MCI’s CAP facilities, some of the infrastructure also could be used to carry residential traffic generated from wireless networks.

Interexchange carrier motivations to support local exchange competition go beyond the opportunity to grab a portion of local service revenue. IXCs hope that handling the local portion of their customers’ calls will help cement loyalties in an era when the LECs will likely be pursuing long-distance business. And competition in the local loop will lower the access fees that IXCs now pay LECs to complete every long-distance call. Since these fees constitute a large portion of the long-distance companies’ costs, they have a powerful stake in the success of wireless networks.

In response to these threats, some LECs are banding together. Pacific Telesis’ former wireless unit, AirTouch Communications Inc., joined with the cellular subsidiaries of Bell Atlantic Corp., Nynex Corp. and U S West Inc. to form PCS PrimeCo L.P. The group acquired several PCS licenses to extend its already considerable wireless coverage. The partners’ combined cellular customer base far exceeds that of any other company or consortium.

LECs generally will be formidable competitors. They already control about 80 percent of the cellular business. Future PCS auctions of 10-meagahertz licenses will give them an opportunity to significantly expand the capacity and reach of their wireless systems. Moreover, LECs have a large base of satisfied customers. And LECs stand to gain a significant share of long-distance revenues when they are allowed to participate in that business. However, LECs also face the prospect of competing directly with each other in their core business for the first time.

Implications for reductions in wireline local exchange carrier subscriber levels from wireless competition are shown in the attached graph. By the turn of the century, wireless services will have achieved sufficient reliability to induce significant numbers of subscribers to cut the wireline umbilical cord. The cumulative number of people expected to have dropped wireline service for cellular and PCS should approach 19 million by 2005. However, as major wireless players, LECs stand to gain more in wireless revenues than they will lose in wireline revenues. Even so, it would be naive not to expect a significant impact on wireline revenues.

Material for this article was drawn from a comprehensive PCS market study and research for an upcoming report on the “New Competitive Telecommunications Landscape” to be published by Falls Church, Va.-based Action Information Services. For more information contact Sim Hall, research director at (703) 847-9805.


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