Posted: 04/1999

Is Wireless Service Telecom’s New ‘Air’
Apparent?
Will New Creative Pricing Schemes for Cellular, PCS
Services Threaten Landline’s Reign?
By Jennifer Knapp

For more than 15 years, competitive providers of cellular service have competed
fiercely against their wired cousins. Convenience has been their trump card. And while
anywhere communications have won converts in droves, wireline long distance providers have
defended their market share with higher quality of service (QoS) and increasingly lower
rates–from near-zero per-minute pricing to per-month plans and even advertiser-supported
free service.

In the past two years, the wireless market has engaged in a price war of its own.
Aggressive discounts from new providers of Personal Communications Services (PCS) were met
by cellular operators’ migration to digital technology and equally low prices.

As a result, wireless carriers have begun to challenge the wireline long distance
industry’s attractive rate plans with some creative schemes of their own, such as
all-inclusive roaming and long distance packages promising free minutes of use (MOUs). An
AT&T Digital One Rate package, for example, starts at $90 and includes no roaming fees
and no long distance charges and 600 free minutes.

These rate plans, which have eliminated high roaming charges and geographically defined
pricing, have drawn in subscribers in record-breaking numbers. Total new subscribers to
AT&T’s Digital One Rate, introduced in May 1998, for fourth quarter 1998 was 445,000,
an increase of 90.1 percent compared to the same quarter in 1997. Certainly, these numbers
speak to a strong contender for wireline services, but is it more?

Wireless carrier AT&T would have consumers believe wireless is unseating wireline;
its recent billboard ads for Digital One Rate read, "This could be your only
phone." Indeed, some industry observers suggest, with price and convenience in its
corner, wireless services could supplant wireline services or, at least, put a serious
dent in its market share.

"We believe as the wireless premium falls, there will be a substitution effect
that drives up wireless usage as subscribers migrate their voice usage," says Crispin
Vicars, program manager-wireless and mobile communications, The Yankee Group, Boston.
"We believe this wireless displacement of wireline voice traffic is largely a
function of utilty– that as the wireless premium is reduced, the value-added
functionality of mobility will help shift an increasing amount of voice usage over to the
wireless network."

Others’ predictions are far less fatalistic. What is more likely, they say, is that
wireless technology will adopt the data and enhanced communications market, leaving the
public switched telephone network (PSTN) to voice.

Falling Prices

The average consumer’s monthly bill has dropped every year since 1988 when the
Washington-based trade group Cellular Telecommunications Industry Association (CTIA)
started tracking wireless billing trends. According to CTIA, the average wireless phone
bill has dropped $55 over the last 10 years (see Chart 1, "Average Consumer’s Monthly
Wireless Phone Bill," below). Boston-based The Yankee Group’s Wireless Price Index
tracked a 5 percent drop for wireless prices in 1998 alone. These decreases reflect the
evolving wireless rate structure, analysts say.

Chart 1, Average Consumer’s Monthly Wireless Phone Bill

"First, [carriers removed] the distinction between peak and off-peak rates, and
then, we saw the implementation of flat roaming and long distance charges," says Mark
Lowenstein, senior vice president, The Yankee Group. "Now we see the growing
popularity of all-inclusive rate plans, which include roaming and long distance
charges."

When the cellular market was forming, the Federal Communi-cations Commission (FCC)
licensed two blocks of spectrum, one to a local telephone company and one to a competing,
unaffiliated company throughout more than 700 U.S. markets, says Dr. Robert Roche,
assistant vice president for policy and research for CTIA.

Pricing plans for original analog services were highly structured and often confusing.

"You paid a monthly fee, and were given X number of minutes," Vicars
explains. "Pricing was pretty highly structured, with peak and off-peak tariffs. You
had a specific area in which you could use your phone, and there were various incremental
charges for roaming and long distance."

In the early 90s, some states required wireless carriers to file tariffs for rates and
entry. The FCC determined, however, that "there was evidence that rates had fallen
faster and that the rate of subscribership was higher in states where rate and entry
regulation had not occurred," Roche explains. States were therefore pre-empted from
practicing rate and entry regulation.

Simultaneous to this event, the FCC determined that restricting wireless providers’
abilities to bundle services and equipment, a practice upon which some states frowned, was
anticompetitive, and the FCC allocated more spectrum for PCS, Roche adds.

The combination of new bundling possibilities and extra capacity from PCS freed up
providers to experiment with pricing packages.

Since then, there has been "a real ramp up in the number of minutes of use (MOUs)
that subscribers now get for the same price plan they would have paid for a few years
ago," Vicars says. "And, a lot of carriers now have started to eliminate the
roaming charge, depending upon the actual coverage of the provider’s network."

Like AT&T, the introduction of Sprint PCS’s all-inclusive roaming and long distance
package brought the carrier very favorable results. In fourth quarter 1998 alone, Sprint
PCS signed on 836,000 new subscribers. Sprint PCS pricing packages start at $30 per month
with 120 free minutes and no long distance or roaming charges.

It’s not only the major carriers that are using streamlined pricing and free MOUs to
entice subscribers. Smaller carriers are embracing this model as well. Amica Wireless
Phone Services, a subsidiary of Iowa City, Iowa-based BRK Wireless Company Inc. and holder
of 13 C and F block licenses in Illinois and Iowa, has put a new twist on wireless pricing
plans with an offering that allows subscribers to build up to increasingly lower
per-minute rates and greater volumes of free usage. The plan starts with a $25 service
charge, which includes 100 free minutes. The next 200 minutes cost 20 cents each, and the
next 100 minutes are free. The 30 minutes above those are 15 cents per minutes followed by
another 200 minutes free. All additional minutes cost 10 cents each. Long distance calls
are 20 cents per minute, and the roaming rate is 40 cents per minute inside the state and
60 cents per minute outside Illinois.

Another small carrier, Cellular South, Jackson, Miss., announced Feb. 3 its support of
the all-inclusive roaming and long distance charges model with the elimination of these
charges for all calls within Mississippi.

All That Glitters

During 1999, voice communications usage is expected to migrate further from landline
networks to wireless networks as competition continues to intensify, analysts say.
"Landline displacement stories are becoming more than an occasional anecdote, as
these roam- and long distance-free price plans compare quite favorably to some payphone,
calling card and even landline intraLATA (local access and transport area) long distance
rates–especially considering the added convenience of mobility," says The Yankee
Group’s Lowenstein.

While the wireless industry may be leveling the playing field a bit with its new
pricing plans, it still suffers from high rates of fraud and churn.

About 5 million mobile phone subscribers were intent on changing carriers due to
cheaper pricing packages between November 1998 and February 1999, according to The
Strategis Group, Washington. In addition, Strategis found that subscribers who intended to
switch were among the most attractive, having higher than average monthly bills compared
to all subscribers–$74 vs. $61.

According to The Yankee Group, 10 percent of current wireless subscribers say they have
switched carriers during the past year. This represents a significant increase from 7
percent in 1997. Nearly 23 percent say they have switched wireless carriers at least once
since they first became subscribers, with 5 percent having switched more than once, The
Yankee Group found.

Fraud also is a major threat to ubiquitous acceptance of wireless services as carriers
face increasing revenue losses, which are expected to reach $677 million by 2002,
according to International Data Corp., Framingham, Mass. And subscription fraud is up,
with losses projected to reach $473 million in 2002.

Helping stem the tide of rising fraud, Little Rock, Ark.-based ALLTEL, a wireless and
wireline carrier, teamed up with Corsair Communications Inc., Palo Alto, Calif., to deploy
Corsair’s Phone-Print in ALLTEL’s Virginia markets. PhonePrint uses radio frequency (RF)
fingerprinting to detect and disconnect cloned phones.

"Because of PhonePrint’s extensive network, it is even more difficult for thieves
to use cloned phones in the United States," says Skip McDowell, vice president of
sales for Corsair.

The PhonePrint area incorporates 130 U.S. markets, Mexico and the Caribbean. As
subscribers in these regions roam to other PhonePrint-protected markets, the system moves
the phone’s RF fingerprint in real time, ensuring that the serving area and the home
markets have both the signal information and the fingerprint on file.

Subscription fraudsters also have a new enemy with Burlington, Mass.-based Lightbridge
Inc.’s Feb. 8 release of @Risk, the newest addition to Lightbridge’s fraud prescreening
and analysis tools. With @Risk carriers can screen or match against suspect information
gathered during prior fraud investigations.

If You Can’t Beat ‘Em

As technology and fraud-prevention techniques improve, some landline carriers are
embracing wireless technology and introducing it into their product portfolios.

Sprint Corp. jumped into the wireless segment with a facilities-based plan for its
Sprint PCS Division, but smaller carriers have used the agent route to introduce wireless
products. UniDial Com-munications Inc., Louisville, Ky., contracted with Sprint at the end
of 1997 to become a Sprint PCS agent. "We introduce customers to Sprint PCS and
provide the phones," says Kent Lanum, director of brand management at UniDial.
"We use it in our sales tactics, too. We not only are providing long distance
services and Internet services, we are also providing a total communications
solution."

Wireless carriers are making agent programs much more attractive for resellers now,
Lanum adds. Not only can an individual just sell the phones and earn a one-time commission
from those sales, but also some companies are starting to offer residual commission on
usage, as is common for long distance services.

"Right now, wireless is such a new product that they do not have to offer these
kinds of commissions," Lanum says, "but I think as market competitors start to
expand to each metropolitan area, we are going to see more and more aggressive moves to
garner market share in that industry just by offering better commission."

While UniDial chose to introduce wireless services to its portfolio through the agent
channel, in 1994 Frontier Corp., Rochester, N.Y., engaged in a joint venture with former
NYNEX Corp. to create a cellular super system in upstate and western New York.

Although Frontier still operates its venture with NYNEX/Bell Atlantic Corp.,
Philadelphia, the carrier has migrated away from being facilities-based to being a
reseller, as owning its facilities was no longer feasible, a Frontier spokesperson says.

The forerunners in bringing wireless into the services mix, these companies are still
few in number. The Washington-based trade group, the Telecommunications Resellers
Assoc-iation (TRA), notes only 15.7 percent of its membership offers both a wireless and
landline product. That percentage should grow as several TRA reseller company members,
such as Network Plus, Quincy, Mass., and Justice Technology Corp., Culver City, Calif.,
build their wireless programs.

The Data Side

These companies say they are not adding wireless in fear that their landline services
soon will be moot. "I think wireless is another means of access that people are going
to explore and use, but I do not think it is going to replace wireline," UniDial’s
Lanum says.

Instead, wired carriers see the wireless space as full of opportunities. As one of the
three top regions in terms of cellular revenues, the U.S. market promises to bring in $76
million by 2002, a growth of $35 million over the next three years, according to Ovum
Inc., London. Moreover, the global forecast for wireless services predicts major growth in
wireless revenues, with an increase from $195 billion in 1998 to $361 billion by year-end
2002, Ovum reports (see Chart 2, "Global Wireless Revenues: 1998-2002," below).
And, Ovum research shows that Western Europe will offer carriers the richest competitive
market with cellular connections expected to reach 183 million by 2002.

In addition, wireless technologies are promising to take the global data services
market by storm in the next 10 years. "By and large, the current PSTN is at or near
capacity, and what I think we are going to see is a migration of enhanced services from
the PSTN to wireless," says Bob Rini, communications attorney for Rini, Coran and
Lancellotta, a telecommunications law firm based in Washington.

Wireless is expected to be the No. 1 data access platform by 2003, according to The
Datacomm Research Co., Chesterfield, Miss., and satellite technology will corner that
market. Subscribers of broadband access services will rise from 470,000 in 1998 to 48.33
million in 2007, according to Pioneer Consulting, Cambridge, Mass. "Broadband
satellites are forecast as a leader in North America by 2007, though in the near term,
cable modem and xDSL (high-speed digital subscriber line) solutions will fight closely for
market leadership," the firm reports. "Cable modems will win the race in the
next five years because of their ability to address the residential market effectively,
but Pioneer believes that broadband satellites will prosper over the long term because of
their ability to address the demand of broadband users throughout North America over a
common infrastructure" (see Chart 3, "Global Broadband Access Subscribers
Summary, 1998-2007," below).

Chart 3, Global Broadband Access Subscribers Summary, 1998-2007

Market Makeover

The continued adoption of wireless services by landline carriers ultimately will lead
the telecommunications industry to integrate the two technologies seamlessly on both the
end user and carrier levels. AT&T’s Personal Network announcement in late January
introduced a new packaging trend that bundles both wireless and landline service onto one
bill and under one price.

"This type of bundled offering is the direction that other carriers will need to
go in order to compete on a national scale in the residential market," says Jilani
Zeribi, research analyst, network services, for Current Analysis, Sterling, Va.

Not only will pricing schemes blur the lines between wireless and landline services,
but Cisco Systems Inc., San Jose, Calif., and Motorola Inc., Arlington Heights, Ill.,
joined forces Feb. 8 to create a new world framework for Internet-based wireless networks.
The companies intend jointly to invest as much as $1 billion over four to five years to
deliver a wireless Internet. This collaboration will deliver the first all-Internet
protocol (IP) platform for the wireless industry that will unite different standards for
wireless services worldwide and open Internet-based platforms for integrated data and
voice services over cellular networks.

Also bringing the PSTN together with wireless technologies is Columbia, Md.-based
TECORE’s AirCore platform switching system. The AirCore platform supports all major
wireless technologies–including global systems for mobile (GSM), time division multiple
access (TDMA), code division multiple access (CDMA) and advanced mobile phone service
(AMPS) for cellular and PCS operators–providing an integrated prepaid package, and
offering tandem switching and wireline service for interexchange carriers (IXCs) and
competitive local exchange carriers (CLECs).

Message Express Co., Delton, Mich., began integrating the AirCore system last September
into its network to interface GSM wireless and GR303 wireline technologies to launch both
wired and wireless services to its customers by the end of the year.

These recent developments, however, are mere hints at a possible new face of
telecommunications that, someday, no longer may make any distinction between wired and
unwired services.

Jennifer Knapp is news editor for PHONE+ magazine.