Timing, surprise and troop strength.
These are the tools used by military leaders worldwide to fight a war, and the same methods should be expected from personal communications services carriers in their bloody battle for market share.
First, you must know when to invade. Now is the time to enter wireless with a new brand name and a new product, said Ben Scott, president of PrimeCo Personal Communications L.P.
The Telecommunications Act of 1996 and the auction of new spectrum at 1900 MHz has created turmoil, imbalance and uncertainty-the right time to attack with a strong new name and product, Scott commented.
In terms of surprise, consider the pre-emptive strike by AT&T Wireless Services Inc. to capture the term PCS. Last October-a month or two before service was launched by PrimeCo and Sprint Spectrum L.P.-AT&T announced it was using the term “Digital PCS” in all of its markets, including its cellular markets. The move temporarily knocked the wind out of a few sails.
It wasn’t until the end of 1996 that any operator was bold enough to offer customers a truly distinctive pricing plan that differed radically from cellular norms.
Powertel Inc. in December floated a package that provided customers with all the airtime they wanted during 1997 for a flat $50 monthly fee.
“That’s how you stimulate demand, encouraging them to use the service so much that it becomes a substitute for wireline,” said Richard Siber, wireless analyst at Andersen Consulting.
“Price is a driver to make that happen,” Siber said.
This is when the carrier must have troop strength-the capital backing that will allow it to make the brazen price offers needed to load the network, while at the same time expending money to create demand.
“There’s a lot of risk here,” Siber said. “But they can’t afford not to drop their price to get the volumes on their system to pay off the debt.” Carriers may not be insisting on a contract, but operators such as Sprint and PrimeCo are locking the phone to their network through a handset/network software subsidy lock. They tell the customer, “This phone will only work on our network.”
Even though the customer paid $200 for the phone, it continues to be a part of the service contract. Ideas discussed two years ago about “separating the phone from the service” continue to blow in the wind. Code Division Multiple Access phones cost the carrier at least double their selling price.
Hence, subsidization of the phone continues.
“We are not of the mind that the ability to charge for handsets will last,” said John Bensche, an analyst with Lehman Brothers Inc. “They may give away handsets with no contracts in a few years if competition gets really fierce,” he said. “I do not sense the contract is such a huge barrier to purchase.”
The handset cost issue is moot to PCS carrier 21st Century Telesis. It is launching a commercial Personal Access Communications System in South Bend, Ind., later this year. “These phones are not complex. They’re almost disposable,” said Drew Hart, 21st Century’s chief executive officer. “They are low power, low cost, with no memory or microprocessor. You can talk on it for hours and it doesn’t get hot.”
But the voice quality of PACS is 32-kilobit, nearly that of landline, Hart said. Because it’s a low-power, low-cost system, carriers can practically give the phones away; PACS isn’t a cellular look alike. “We think we’ll be the company the public markets will see is different.”
Carriers that can quickly develop software and marketing platforms to satisfy unique customer demands are positioned to succeed, according to Michael Elling, Prudential Securities Inc.’s senior wireless analyst.
“If demand is not satisfied within a certain time frame, then network investment will not be recouped before a potential competitor can come along with a lower-cost solution, satisfy that demand, and steal that customer,” Elling said.
Both Siber and Elling suggest that geographically fragmented players need to consolidate into regional and nationally scaled providers.
“The viability of a regional-long term and even if they are strong-is questionable,” Siber said.
“They have to be best in class and an incredibly strong player to make it. I’d compare it to the airline industry and regionals like Southwest Airlines that draw a niche and stick to it,” he said.
With its strong market presence in the Midwest and its regional PCS strategy, Ameritech Cellular Services may be the Southwest Airlines of the wireless business.
However, even Southwest Airlines has branched out in recent years from its original regional focus of quick, cheap flights. Southwest flies to California today and recently has tried to move into the East Coast markets.
“Regional players can get away from what made them strong regionals. Most industries have gone through a period where the strong regionals are picked up by bigger players. I predict three to four super providers in the future,” Siber said.
