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ENTRY STRATEGIES OF PERSONAL COMMUNICATIONS SERVICES (PCS)
PROVIDERS IN THE US. CELLULAR COMMUNICATIONS INDUSTRY

By

Isabelle M. Dabadie

A THESIS
Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF ARTS

Department of Telecommunications

1 996

ABSTRACT

ENTRY STRATEGIES OF PERSONAL COMMUNICATIONS SERVICES (PCS)
PROVIDERS IN THE US. CELLULAR COMMUNICATIONS INDUSTRY

By

Isabelle M. Dabadie

Prompted by technology advances and industry demand, the Federal Communications
Commission decided; in 1994 to allocate more spectrum for cellular communications in
the US. and to allow more competition in the industry. Licenses have been awarded to
provide digital cellular communications in the 1900 MHz frequency band called Personal
Communications Services. The introduction of PCS has tremendously transformed the
industry which promises high growth and fierce competition. The goal of this paper is to
analyze the competition in the newly reformed industry and to determine what kind of
entry strategies are pursued by PCS operators. This study is based on a structural and a
competitor analysis using Porter’s framework and is supported by empirical data. Despite
the limitations of strategy forecasts, this study identified a great potential for
differentiation and niche strategies. As the industry opens to the mass market. customer

focus will be the key.

TABLE OF CONTENTS

LIST OF TABLES ......................................................................................................... vi
LIST OF FIGURES ...................................................................................................... viii
INTRODUCTION ........................................................................................................... 1
CHAPTER 1
THE WIRELESS COMMUNICATIONS MARKETS ..................................................... 4
1.1. Evolution of wireless communications ....................................................................... 4
1.1.1. Early history ...................................................................................................... 4
1.1.2. Emergence of cellular communications ............................................................... 5
1.1.3. Introduction of PCS ........................................................................................... 6
1.2. “Traditional” cellular communications ....................................................................... 9
1.2.1. Not so “traditional” cellular ................................................................................ 9
1.2.2. Technology ...................................................................................................... 10
1.2.2.1. How cellular works ................................................................................... 10
1.2.2.2. Technology and standards ......................................................................... 11
1.2.3. The cellular market .......................................................................................... 12
1.2.3.1. Trends ....................................................................................................... 12
1.2.3.2. Players ...................................................................................................... 12
1.2.3.3. Subscribers ................................................................................................ 14
1.3. “New” PCS ............................................................................................................ 15
1.3.1. Definition ofPCS ............................................................................................. 15
1.3.1.1. A variety of definitions .............................................................................. 15
1.3.1.2. FCC definition ........................................................................................... 17
1.3.1.3. Other definitions ........................................................................................ 17
1.3.2. What are PCS services? .................................................................................... 18
1.3.3. Spectrum allocation and licenses ...................................................................... 20
1.3.3.1. Spectrum allocation ................................................................................... 20
1.3.3.2. Licenses .................................................................................................... 21
1.3.4. PCS auctions ................................................................................................... 22
1.3.4.1. Principle .................................................................................................... 22
1.3.4.2. Results of broadband PCS auctions ........................................................... 22
1.3.5. Technology and standards ................................................................................ 25
1.3.5.1. How PCS works ........................................................................................ 25
1.3.5.2. Standards .................................................................................................. 27

iii

1.3.6. Difl‘erences between cellular and PCS ............................................................... 28

1.3.7. The PCS market ............................................................................................... 32
1 .3 .7. l. Perspective ................................................................................................ 3 2
1.3.7.2. Players ...................................................................................................... 34
CHAPTER 2
STRUCTURE AND CHARACTERISTICS OF THE CELLULAR INUDSTRY .......... 37
2.1. Theory: The Structural Analysis of industries by M. Porter. .................................... 37
2.1.1. Context of strategy formulation ........................................................................ 37
2.1.2. Structural determinants of the intensity of competition ..................................... 37
2.1.2.1. Threat of entry .......................................................................................... 39
2.1.2.2. Intensity of rivalry among existing competitors .......................................... 41
2.1.2.3. Pressure from substitute products .............................................................. 42
2.1.2.4. Bargaining power of buyers ....................................................................... 43
2.1.2.5. Bargaining power of suppliers ................................................................... 44
2.1.2.6. Government as a force in industry competition .......................................... 45
2.2. Structural analysis of the cellular services industry ................................................... 45
2.2.1. Industry definition ............................................................................................ 45
2.2.1.1. The wireless communications industry ....................................................... 46
2.2.1.2. Boundaries of the cellular communications industry for the purpose of the
analysis .................................................................................................................. 50
2.2.2. Industry form and environment ......................................................................... 52
2.2.3. Forces of competition ...................................................................................... 54
2.2.3.1. Entry barriers ........................................................................................... 54
2.2.3.2. Rivalry among existing competitors ........................................................... 58
2.2.3.3. Pressure from substitute products .............................................................. 63
2.2.3.4. Bargaining power of buyers ....................................................................... 64
2.2.3.5. Bargaining power of suppliers ................................................................... 66
2.2.3.6. Government as a force in the industry ........................................................ 67
CHAPTER 3
COMPETITIVE STRATEGIES IN AN EMERGING INDUSTRY .............................. 70
3.1. Characteristics of emerging industries ..................................................................... 70
3.1.1. Definition ......................................................................................................... 70
3.1.2. Structural environment ..................................................................................... 71
3.1.2.1. Common structural characteristics ............................................................. 71
3.1.2.2. Early mobility barriers ............................................................................... 71
3.1.3. Problems constraining industry development .................................................... 72
3.1.4. Early and late markets ...................................................................................... 73
3.1.5. Strategic choices .............................................................................................. 74
3.2. The cellular industry ................................................................................................ 75
3.2.1. An emerging industry ....................................................................................... 75
3.2.2. Structural environment ..................................................................................... 75
3.2.2.1. Structural characteristics ........................................................................... 75
3.2.2.2. Early mobility barriers ............................................................................... 77

iv

3.2.3. Problems constraining industry development .................................................... 77

3.2.4. Early and late markets ...................................................................................... 79
3.2.5. Strategic choices .............................................................................................. 81
CHAPTER 4
COMPETITIVE STRATEGIES .................................................................................... 84
4.]. Generic competitive strategies............................................. .................................... 84
4.1.1. Three generic competitive strategies ................................................................. 84
4.1.1.1. Overall cost leadership ............................................................................... 85
4. 1. 1.2. Differentiation ........................................................................................... 85
4.1.1.3. Focus ........................................................................................................ 86
4.1.2. Risks of the generic strategies .......................................................................... 86
4.2. Entry strategies for PCS providers .......................................................................... 87
4.2.1. Early trends vs. long term strategies ................................................................. 87
4.2.2. PCS vs. Cellular ............................................................................................... 88
4.2.3. Market Segmentation ....................................................................................... 89
4.2.4. Potential and limits of cost, differentiation and focus strategies. ........................ 93
4.2.4.1. Cost leadership strategy ............................................................................. 93
4.2.4.2. Difl‘erentiation strategy .............................................................................. 97
4.2.4.3. Focus strategy ......................................................................................... 100
CHAPTER 5
COMPETITOR ANALYSIS ....................................................................................... 104
5.1. Theory and scope of the competitor analysis ......................................................... 104
5.1.1. Porter’s framework for competitor analysis .................................................... 104
5.1.2. Scope of the analysis for the purpose of our research ..................................... 104
5.1.3. Method .......................................................................................................... 105
5.2. PCS Competitor analysis ....................................................................................... 106
5.2.1. A variety of competitors ................................................................................. 106
5.2.2. Competitors strengths and weaknesses for each strategy ................................ 109
5.2.2.1. PCS-only providers: true new wireless entrants ....................................... 110
5.2.2.2. PCS & Cellular providers: the “so-called” newcomers ............................. 111
5.3. The examples of Sprint PCS and AT&T Wireless. ................................................. 112
5.3.1. Sprint PCS ..................................................................................................... 112
5.3.1.1. Company profile ...................................................................................... 112
5.3.1.2. The product ............................................................................................. 113
5.3.1.3. PCS offer in Washington/Baltimore ......................................................... 114
5.3.1.4. Strategy ................................................................................................... 115
5.3.2. AT&T Wireless .............................................................................................. 119
5.3.2.1. Company profile ...................................................................................... 120
5.3.2.2. Strategy for PCS ..................................................................................... 121
5.3.2.3. Positioning issue: digital cellular vs. PCS ................................................. 122
CHAPTER 6
CONCLUSION ........................................................................................................... l 25

LIST OF TABLES

Table 1 - Cellular market trends ..................................................................................... 12
Table 2 - Ten biggest players ranked by number of subscribers ....................................... 13
Table 3 - Market share and market of the ten biggest cellular players ............................. 13
Table 4 - Usage/Reasons to own .................................................................................... 14
Table 5 - Findings of the Yankee Group’s 1996 Mobile User Survey .............................. 15
Table 6 - Spectrum allocation for broadband PCS .......................................................... 20
Table 7 - PCS A&B Block Auctions Final Results: Top 10 high bids by bid size ............. 23
Table 8 - PCS Block A&B Auctions Final Results: Top 10 Markets by Net $/POP ........ 23
Table 9 - PCS C Block Auction Final Results: Top 10 high bids by bid size. ................... 24
Table 10 - PCS C Block Auction Final Results: Top 10 markets by NetS/POP ............... 24
Table 11 - PCS C Block Re-Auction Final Results ......................................................... 25
Table 12 - Top 8 A&B-Block licensees by POPs. ........................................................... 35
Table 13 - Top 4 C-Block licensees by POP. .................................................................. 36
Table 14 - Potential range of competitors and technologies for wireless services. ........... 47
Table 15 - Segmentation by mode of communication. .................................................... 48
Table 16 - Segmentation of wireless communications. .................................................... 51
Table 17 - Risk of generic strategies .............................................................................. 87

vi

Table 18 - Comparison of major A&B&C PCS licenses ............................................... 108

Table 19 - Sprint PCS’s major markets. ....................................................................... 113
Table 20 - PCS offer in Washington/Baltimore: Basic services. .................................... 114
Table 21 - PCS offer in Washington/Baltimore: High-end services. .............................. 115
Table 22 - Major PCS markets of AT&T Wireless. ...................................................... 120

vii

LIST OF FIGURES

Figure l - U.S. Wireless Communications Industry - Basic Penetration Model ............... 33
Figure 2 - Combined Cellular and PCS Demand in the US. (1984-2005) ....................... 34
Figure 3 - Chain of substitutability. ................................................................................ 51
Figure 4 - Barriers and profitability ................................................................................ 62
Figure 5 - Generic Competitive Strategies ...................................................................... 84
Figure 6 - Importance vs. Satisfaction. ........................................................................... 90
Figure 7 - Customer reported importance of service attributes ........................................ 91

Figure 8 - Comparison of Salt Lake City wireless tariffs at 70% peak and 30% off-peak

pricing. (activation fees not considered) ................................................................. 95

viii

INTRODUCTION

This paper analyzes the evolution of the wireless communications industry resulting from
the introduction of PCS. More particularly, it is aimed at giving a perspective on the
competitive strategies being developed by the different players in the field. The overall
goal of this paper is to provide the reader with tools to understand the evolution of the
market and determine which strategies are likely to permit survival in this highly

competitive but fast growing market.

This study aims at answering two research questions. First, how is the new competitive
landscape in the cellular services industry transformed by the emergence of PCS? Second,

what kind of entry strategies are pursued by the PCS operators?

Several reasons account for my interest in these questions. PCS is the emerging segment
of the wireless telecommunication industry. With the first licenses granted in 1994 for
narrowband and 1995 for broadband, PCS was first made commercially available in
November 1995 in the Washington DC and Baltimore regions by American Personal
Communications (an affiliate of Sprint Spectrum). Since then two more operators have

commercialized their services: Bellsouth Mobility DCS and Western Wireless Corporation

(under the commercial name of Voicestream). However, many PCS licensees are expected
to launch their services by the end of 1996 and the beginning of 1997.

The PCS industry is expected to experience an extraordinary growth in the coming years.
In a context of intensified competition, convergence of technology and increased mobility
stirred by the New Telecommunication Act, Personal Communication Services will
revolutionize the wireless communications industry.

With new spectrum resources and obligations to provide services using digital technology,
PCS will enter in competition with the “traditional” cellular industry. Encompassing a
wide variety of communication services including mobile telephony, messaging and
paging, PCS will create new services as well as compete with existing ones.

Various strategies are being pursued. What is certain is that PCS operators, having
invested millions in bids for licenses, will seek maximum reward for the stakes they have
taken. However, it is also certain that the so-called “traditional cellular operators” will not
passively watch the entry of these new PCS competitors. The cellular industry will
undergo an important evolution too.

As a result, studying PCS competitive strategies entails analyzing cellular as well, since the
evolution of these two markets are very interrelated. The fact that some players are
involved in both markets at the same time will make the evolution of PCS and cellular
even more intertwined.

Finally, for a new industry promising an enormous grth in the very near fixture, it is
critical to understand its dynamics. Cellular will compete with wireline services but also
create new usage. As a result, some people say that the wireless market will grow so much

that there will be room for everybody to compete. However, most likely not all of the

competitors will survive. This paper will enable the reader to understand how the actors

will compete and what will happen.

This analysis is divided in five chapters. In chapter 1, I Swill describe the cellular
communications market, position the new PCS entrants relative to the existing cellular
providers, and lay the ground for the competitive analysis. In chapters 2 and 3, I will
analyze the forces of competition in the market and highlight the issues specific to an
emerging industry. In chapter 4, I will look at the entry strategies that may be undertaken
by the PCS providers in this highly competitive industry. Based on the structural and
market analyses, I will assess the likelihood of such strategies and their chances of success.
Finally, I will make a limited competitor analysis and assess the competitive strategies in
the light of the characteristics of two strategic groups in chapter 5. Two case studies will

illustrate this analysis.

Michael Porter’s Competitive Strategy and Competitive Advantage theories are used as a

theoretical framework throughout this study.

Chapter 1

THE WIRELESS COMMUNICATIONS MARKETS

This section gives a broad overview of the development of wireless communications. Far
from being a thorough analysis of the market, it is aimed at presenting PCS, the emerging
segment of the industry. I assume here that the reader is knowledgeable of the wireless
communications services industry, yet will benefit from a brief reminder of important facts
and recent developments in this field. Moreover, I will outline some characteristics of the
industry ——such as the nature of the difference between cellular and PCS— that are critical

to understanding the competitive analysis that will follow.

1.1. Evolution of wireless communications

1.1.1. Early histog

The origins of radio or “wireless” communications rest in the developments of theoretical
physics of the 19th century. Maxwell’s electromagnetic wave theory, following earlier
hypotheses from Faraday and Newton, was confirmed by Hertz in the late 1880’s. In the
late 1890’s Marconi looked for uses of wireless communication in wireless telegraphy.

The invention of the vacuum tube by De Forest in 1906 enabled waves to carry voices as

well as telegraph signals. In the 1920’s the police and fire departments started using the
first mobile radio systems. In 1935, Arrnstrong’ s invention of FM radio technology was a
watershed in the history of wireless radio communications.

The use of mobile radio systems then slowly spread to the private sector. In 1946, AT&T
introduced a new mobile radio technology (MT S) which was the first to provide
interconnection to the PSTN. Its usage grew steadily in the 1950’s although it was slowed
by a lack of capacity. In the 1969, AT&T introduced a redesigned system called IMTS yet
this did not solve the capacity issue. In 1970, AT&T presented the FCC with a plan to
provide services based on a concept known as cellular telephony, conceived by Bell
Laboratories in 1947. Whereas mobile telephony used one powerful transmitter to send
messages throughout large regions, cellular telephony uses many low-power,
interconnected transmitters to send messages within smaller geographic areas known as
cells. The idea of the technology is to expand the capacity of the system thanks to
frequency re—use, meaning each cell has its own transmission equipment and channels.
When a user moves from cell to cell, the call is re-routed thanks to a technique called

handofi'.

1.1.2. Emggence of cellular communications

In the 1970 the FCC allocated radio fi'equencies for mobile telephony use, and with the
development of large-scale integrated circuits in the early 1970’s, cellular communications
became technically feasible and spectrally efficient. In 1975, the FCC allocated 115 MHz

of spectrum of the 900 MHz frequency range to mobile communications and proposed to

allow one carrier per market. In 1977, the FCC authorized AT&T and American Radio
Telephone Service (ARTS) to develop experimental cellular mobile systems respectively in
Chicago and the Baltimore-Washington area but cellular service was first provided in

1983, exclusively by AT&T in Chicago.

In 1982, the FCC set up rules for the cellular markets by dividing the country into 734
territories and permitting no more than two companies to operate in each region. One of
them would be the telephone company providing wireline telephone service in the market,
and the other one would be anyone else. With the divestiture of AT&T in 1984, all the
licenses reserved for wireline companies were awarded to RBOCS or larger independent
telephone companies (e. g., GTE, Sprint, Contel Cellular). The second licenses went to a
very diverse group of companies from difl‘erent origins (paging, broadcasting, cable, long

distance, press, etc).

Cellular communications experienced an important growth yet their development was
hindered by several factors. Among them were the problem of spectrum allocation, a poor
quality of service particularly in urban areas, and last but not least, the limits of the

duopoly system favoring prices above the competitive level.

1.1.3. Introduction of PCS

With only two providers per market, competition in the wireless telecommunications

services was considered insufficient. Scarcity of spectrum being the primary barrier to

entry for potential competitors to the cellular operators, the FCC decided to take steps to

encourage competition.

In 1993, the FCC devised a plan to reallocate spectrum as a provision for a new class of
wireless services called Personal Communications Services. The plan proposed the
allocation of 120 MHz of spectrum for broadband PCS licenses to be auctioned off to the
highest bidder. Initial plans allowed for up to seven PCS providers, with varying spectrum

blocks, in each market.

This decision also responded to pressures from the industry which wanted better access to
the market through new licenses, and from the US equipment manufacturers who wanted
to expand worldwide. As a matter of fact, the US had located its cellular services in a
different spectrum hand than Europe and Asia. The auctionning of PCS licenses was also

motivated by the opportunity to generate firnds to reduce the federal budget deficit.

In 1994, the FCC awarded ten national and 30 regional licenses for narrowband PCS
which can be used to provide new services such as voice message paging, two-way
acknowledgment paging and other data services. On December 5, 1994, the FCC began its
first auction for broadband PCS licenses. Prior to the auction, the FCC divided the United
States and its territories in 51 Major Trading Areas (MT As) based on designations
contained in the Rand McNally Commercial Atlas and Marketing Guide. Two PCS
licenses were allocated to each MTA (A & B). Licenses in block A and B were auctioned

in 48 MTAs; in the other three MTAs, only the block B license was auctioned. In those

three MTAs, the block A licenses had already been awarded under the commission’s
pioneer’s preference rules. The auction for broadband PCS licenses was completed on

March 13, 1995.

Within the 51 MTAs, additional licenses were auctioned off for 493 Basic Trading Areas
(BTAs). Each of them generally corresponds to a single metropolitan area. The 1,972
licenses to be issued include about 1,000 in the so-called entrepreneur’s block (Block C),
in which limitations on eligibility apply and where special provisions were made to benefit

“designated entities” —small businesses, women, minorities, and rural providers.

The auctions for block C licenses were closed on May 6, 1996 and 18 licenses that were
defaulted on by two companies were re-auctioned in July 1996. Block D, E, F auctions are

still being held.

PCS operates in basically the same way as cellular although in a different frequency.
Whereas cellular operates in the 850 MHz range, broadband PCS operates in the 1900
MHz range. With a larger number of smaller cells, they operate at a lower power level and
use spectrum more efficiently. Unlike cellular systems which started with analog
technology, PCS systems have been digital from their inception. We will take a closer look
at the characteristics of PCS later and emphasize the differences between cellular and

PCS.

1.2. “Traditional” cellular communications

1.2.1. Not so “tragiitional” cellula_r

 

Technically, Personal Communications Services are cellular communications only they
operate in a different spectrum band. This problem of how to distinguish adequately
between PCs and cellular creates confusion in the industry. As a matter of fact, when
people mention cellular, it is not clear whether they refer to the existing cellular
communications in the 800MHz band or to the range of cellular communications including
PCS —the cellular communications in the 1900MHz band. Furthermore, there is no single
definition of PCS, and the distinction between PCS and cellular is an endlessly debated
issue. Some claim that the distinction between PCS and cellular no longer exists while
others present PCS as a watershed in the wireless communications industry. This makes it
all the more difficult to understand what people are talking about. We will study this issue

in more detail in the paragraph defining PCS.

In order to end this confirsion, one could be tempted to oppose “traditional” cellular
communications in the 800MHz to the “new” PCS communications. However, this would
mean mistakenly assuming that the cellular communications that were developed prior to
the new generation of PCS are not evolving. Initially based on analog technology ——~—unlike
PCS which are digital from their inception— cellular carriers urged by the new
competition are migrating to digital. As a result, we better talk about the “new” cellular

communications rather than the “traditional”.

10

We will tackle this issue again as we define the industry for the purpose of the analysis in
Porter’s framework. In this paper, the cellular communications industry will refer to both
cellular and PCS. However, cellular as opposed to PCS will usually refer to the 800MHz
cellular. When clarification is needed we will mention “existing” cellular or “incumbents”,

to difi‘erentiate them from the PCS newcomers.

1.2.2. Technology

1.2.2.1. How cellular works

In an industry report, the US. International Trade Commission makes a very simple
description of a cellular system. It is composed of three parts: cellular phones, radio base
station equipment and one or more mobile telephone switching office (MTSO). The
subscriber uses the phone to place or receive phone calls over the system, while radio base
station equipment at each cell site acts as an interface between the phone and the MTSO.
The MTSO is the brain of the system, coordinating traffic among cell sites and switching
calls to connect mobile subscribers with other mobile subscribers and with the public-
switched wireline telephone network. Each cell is equipped with a low power
transmitter/receiver known as the base station. Depending on topography and population,
the radius of a cell can range fi'om 2 to 10 miles. Typically, the base station of each cell is
connected to a MTSO by means of either conventional telephone lines or microwave
technology. The MTSO is a central switching point that monitors signals and hands off
calls to the next cell if the subscriber crosses the border. When the subscriber moves

outside of the home system’s area, it is called roaming.

11

1.2.2.2. Technology and standards

First generation cellular telephony uses analog technology. The world’s most popular
cellular telephone systems are AMPS (Advanced Mobile Phone System), developed in the
United States, and TACS (Total Access Cellular System) developed to serve various
European countries. The American AMPS is an 800 MHz system. The multiple access
method used by these systems is FDMA (Frequency Division Multiple Access).

In the late 1980’s and early 1990’s, analog cellular experienced capacity shortages in
certain metropolitan areas, reducing transmission quality. Cell-splitting solved the quality
issue in most places but the capacity remained an important concern. To address this
problem, cellular is migrating from analog to digital technology. This technology increases
transmission speed, protects transmission integrity and allows service providers to offer an
expanding new array of data services. To manage the transition from analog to digital,

some systems have been designed to use both analog and digital transmission.

In the US, two competing digital technologies for cellular communications have emerged:
TDMA (Time Division Multiple Access) and CDMA (Code Division Multiple Access). A
derivative of TDMA technology incompatible with US standards has been implemented in

the European global system for mobile communications (GSM) digital network.

12

1.2.3. The cellular market

1.2.3.1. Trends

Table 1 - Cellular market trends

 

 

 

 

 

 

 

 

 

 

 

 

1 994 1 995 Evolution
Subscribers 24, 134, 421 33, 785, 661 + 40%
Market penetration 9.55% 13.38% +3.83%
Number of cells 17,920 22,663 + 26.65%
Subscribers per cell 1,256 1,490 + 18.63%
Average monthly bill $56.21 $51 + 9.27
Average leggth of call 2.24 minutes 2.15 minutes - 4%

 

Source: CTIA.

The cellular market has experienced an enormous grth in 1995. The market penetration
of cellular has reached 12.7% and has more than doubled in two years. According to a
survey from Donaldson, Lufldn and Jenrette, the market should keep growing. With 9

million more customers, cellular penetration should reach 16% of the population in 1996.

Another important trend is that while the number of subscribers is increasing, their average

monthly bill is decreasing.

1.2.3.2. Players
There are three different kinds of cellular players e. g. independent local and long distance

companies, RBOCS and all-wireless companies (Airtouch, 360 deg)

13

Table 2 - Ten biggest players ranked by number of subscribers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company 1994 1995 Evolution
AT&T 2,790,000 3,900,000 + 39.8%
SBC Communications 2,979,000 3,659,000 + 22.8%
Bell Atlantic Nynex Mobile 2,340,000 3,356,000 + 43.3%
GTE Mobilnet 2,339,000 3,011,000 + 27.8%
Bellsouth 2,155,820 2,847,416 + 32.8%
Airtouch Cellular 1,560,000 2,262,000 + 45%
Ameritech 1,299,000 1,891,000 + 45.5%
360 deg communications 1,040,000 1,455,000 + 39.9%
US West 968,000 1,339,000 + 38.3%
US Cellular 421,000 710,000 + 68.6%

 

 

Source: Merrill Lynch Estimates.

Table 3 - Market share and market of the ten biggest cellular players

 

 

 

 

 

 

 

 

 

 

 

 

Company POPs(l) Market share (2) Market penetration (3)

AT&T 68.3 11.54% 5.7%
BANM 57 9.9% 5.88%
GTE Mobilnet 49.3 8.91% 7.63%
SBC Communications 47.9 10.83% 6.1%
Bellsouth 47.4 8.42% 6%

Airtouch Cellular 38 6.7% 5.95%
Ameritech 25.2 5.6% 7.5%
US Cellular 21 4.3% 3.37%
US West 20.3 3.96% 6.6%
360 deg communications 19.5 2.1% 7.44%

 

 

 

 

 

(1): Potential cellular subscribers in millions. Base census US 1990. Source: CTIA.

(2): Market share in December 1995 (number of subscribers of the company / number of
subscribers nationwide). Source: Donaldson, Lufkin & Jenrette 1995.

(3): Market penetration of the competitors in their market in December 1995 (number of
subscribers of the company / POPs of the company). Source Donaldson, Lufkin & Jenrette
1995.

Most of the major telecommunications carriers are among the biggest players in cellular.
Sprint was one of them until they spun-off their cellular licenses which became 360 deg.

Communications. On the contrary, MCI which was absent from the cellular field until

14

1995, but playing in the ESMR field instead, joined the cellular big players thanks to the
acquisition of Nationwide Cellular. Airtouch and 360 deg. are the only independent

cellular companies in the big ten. About 1500 independent companies share the remaining

26% of the market.

1.2.3.3. Subscribers
There were 33.8 million subscribers on December 31, 1995. 53% were men and 47% were
women. On average, the cellular subscriber is 42 years old and has an annual income of

$65,000. The reasons for subscribing are summarized in the following table:

Table 4 - Usage/Reasons to own

 

 

 

 

 

 

Current users New users Potential users
Conduct Business 47% 36% 17%
Call fiiends/family 3 0% 21% 3 2%
Safety 1 9% 40% 48%
Other 4% 3% . 3%

 

 

 

 

Source: CTIA

 

15

Table 5 - Findings of the Yankee Group’s 1996 Mobile User Survey

 

 

o The typical cellular phone user makes 10 The wireless lifestyle

calls a week. 0 The average survey respondent works
0 91% of cellular users are satisfied with about 51 hours a week at both primary
their current cellular service. and secondary work space.

0 60% of cellular users make the majority 0 The mean commuting time for the
of their calls within their home metro average respondent is 29 minutes.
area, but 58% of cellular users agree that o 60 % of business travelers that responded

having nationwide coverage is important. spend more than 15 days a month on the
o The average price paid for a cellular road.
phone is $142.

0 15% of cellular users said they would
increase their usage if the service was
priced 10% lower. 77% of cellular users
said they would increase their usage if
prices were 50% lower.

0 61% of portable computer users are
interested in using wireless data services.
31% of portable computer users believe
wireless data transmission is too
complicated and 60% believe it is too
expensive.

 

 

Source: Yankee Group.

1.3. “New” PCS

1.3. 1. Definition of PCS

1.3.1.1. A varietm definitions

Although everybody will agree that the acronym PCS stands for Personal Communication

Services, nowhere will you find two interpretations of what it means that are exactly the

 

16

same. As a matter of fact, PCS has a variety of definitions ranging from: “PCS is 2 GHz”

to very visionary descriptions of the services and applications it may provide.

TPG’s Telecom Lingo Guide Online gives the following definition: “11mm
Communications Services: A term coined by the FCC to describe an intelligent, digital,
two-way, wireless telecommunications system that someday may make it possible to reach
an individual at any time, in any place, by dialing that individual’s telephone number. The
PCS concept embraces cordless phones, cellular mobile phones, paging systems,
microcell-based personal communications networks, wireless office phone systems and
any other wireless telecom technology that allows people to place and receive voice and
data calls while away from home or out of the office. PCS could be a complement to the

present mobile and terrestrial phone networks or a competitor.”

Despite the large number of definitions that can be found for PCS, or maybe because of it,
the meaning of this term is not clear in people’s minds. “Personal Communications” clearly
refers to the concepts of unique personal phone number and customized services.
However, since PCS is relatively a new approach to wireless communications services,
without being a complete new service or new technology, people have difficulties

differentiating it from the existing cellular communication services.

It is critical here to know what PCS is, but more importantly to understand that its

meaning remains very vague. This will have important consequences on the marketing

17

strategies being developed by the different players in the wireless communications arena,

since they are likely to use their own “personal” definition, according to their interests.

1.3.1.2. FCC definition
The FCC defines PCS as “a family of mobile portable radio communications services
which could provide services to individuals and business, and be integrated with a variety

of competing networks”.

1.3.1.3. Other definitions

People define PCS by what it is and is not.

PrimeCo Personal Communications: “PCS, or Personal Communications Services is a new
class of wireless telecommunications services made possible by the Federal
Communications Commission’s (FCC) decision to allocate new public radio spectrum to

meet the growing demand for wireless communications.”

In “Is PCS going nowhere fast?” Alan Stewart quotes the following definitions. For the
American National Standards Institute ( ANSI), PCS is “the next generation of telephony
extended to wireless users based on any one of the seven US standard radio technologies
available now (or soon)” According to Vinay Patel, Marketing Manager for Hughes
Network Systems: “We should not view PCS as a technology because what it really is is a

set of advanced services.”

18

Christine Yovnello, Systems Engineer at AT&T Bell Laboratories: “PCS is an

evolutionary concept, but not a revolutionary one.”

1.3.2. What are PCS services?

 

According to the FCC, broadband PCS services will encompass a variety of mobile
services including an entire family of new communications devices utilizing very small,
lightweight, multifunction portable phones; portable fac-simile and other imaging devices;
new types of multi-function cordless phones; advanced services with two way capabilities.
Broadband PCS systems will be able to communicate with other telephone networks as
well as with personal digital assistants, allowing subscribers to send and receive data
and/or video messages without connection to a wire. Broadband PCS could also be used
in the development of more advanced wireless phone services that would be able to

pinpoint the subscriber in any given locale.

PCS is seen as an improvement on the existing cellular and paging services. In the long run
it is also viewed as a substitute for the traditional wireline services. Yet it is hard to tell
what PCS services will look like in the future. As PCS services are starting to be
commercialized, some examples of evolving services are:

c Mobility

o Portability: small, light weight, pocket carried handsets.

0 Personalized service profile

19

0 Universal address: This features associates one a telephone number with a person,
regardless of where he or she is, and regardless of who his or her service provider is.
However, although PCS networks have the capability to track a user, this is not yet true
for all communications networks and requires implementation of data bases,

administration procedures and rules for number portability.

From the user’s point of view, broadband PCS today is an all-in-one wireless personal

communications systems. It gives the subscriber a phone, an answering machine and a

pager in one portable device. Other important characteristics of PCS systems are:

0 a wide range of features including caller ID, voice mail, text messaging, call waiting, call
forwarding, call barring, information services;

0 privacy and security of communications;

0 better voice quality and clarity.

From a customer service perspective, PCS presents new characteristics:

0 absence of long-term service contract;

0 over-the-air activation.

This paragraph briefly summarized what are and what may be in the future some important
PCS services. However, this does not mean that these services are exclusive to PCS. As a
matter of fact, most of them are being developed by cellular providers as they move
toward digital technology. We will tackle this issue again as we study the differences that

exist between cellular and PCS.

20

1.3.3. Spectrum allocation and licenses

1 .3 .3. 1. Spectrum allocation

The spectrum for PCS is divided into three broad categories, broadband, narrowband, and

unlicensed. The FCC has allocated a total of 120 MHz of spectrum to broadband PCS, 3

MHz for narrowband and 20 MHz for unlicensed.

Table 6 - Spectrum allocation for broadband PCS

 

 

 

 

 

 

 

 

Channel Channel Spectrum frequency Markets Number and Auction

block size type of licenses period

A 30 MHz 1850-1865 / 1930-1945 51 WAS 48 Standard 5 Dec. 94 -
MHz 3 Pioneer’s 13 Mar. 95

Pref.

B 30 MHz 1870-1885 / 1950-1965 51 MTAs 51 Standard A 5 Dec. 94 -
MHz 13 Mar. 95

C 30 MHz 1895-1910/ 1975-1990 493 493 completed
MHz BTAs Entrepreneur May 6, 96*

D 10 MHz 1865-1870/ 1945-1950 493 493 Standard began Aug.
MHz BTAs 26, 1996

E 10 MHz 1885-1890/ 1965-1970 493 493 Standard began Aug.
MHz BTAs 26, 1996

F 10 MHz 1890-1895 / 1970/ 1975 493 493 began Aug.
MHz BTAs Entrepreneur 26, 1996

 

 

 

 

 

 

Source: PCS Primer.

 

21

* C-Band Re-auction: 18 licenses that were defaulted on by two companies were re-

auctioned in July 1996. Auctions began on July 3 and closed in round 25 on July 16.

1.3.3.2. Licenses

 

The licenses vary by size of market and bandwidth. Licenses in blocks A and B cover
MTAs while in C, D, E, and F they cover smaller BTAs. A, B, and C block licenses are for
30 MHz each while D,E, and F are for only 10 MHz. The licenses also differ by the type
of potential licensees or the conditions in which they were awarded. The three forms of

licenses are standard, entrepreneur, or pioneer’s preference.

Standard licenses are the most common type. They are the licenses awarded in the block
A, B, D, and E and for which anyone could bid without economic restrictions. The
Entrepreneur’s licenses are for the C block and F block. Eligibility for these licenses is
limited to benefit some “designated entities” often referred to as “swimmers”: small
business, women, minorities and rural providers. Unlike standard licensees who have to
pay for their licenses as soon as they receive them, small businesses may benefit from
installment payment plans and are eligible for a 25% bidding credit (a 25 percent reduction
in the price of the winning bid). The rules for cross-ownership of PCS licenses by cellular
and CMRS providers are relaxed for entrepreneur companies. Pioneer’s preferences are
licenses awarded to operators promoting first-time and new spectrum-efficient
technologies. Three pioneer’s preference licenses were awarded for broadband PCS, all in
the block A. American Personal Communications (APC) received a license for the

Washington, DC / Baltimore MTA, Cox Enterprises, Inc. received the license for the Los

22

Angeles / San Diego MTA, and Omnipoint Communications, Inc. received the license for
the New York / northern New Jersey MTA. Although the FCC’s initial plan was to award
these licenses for free, APC, Cox and Omnipoint were required to pay at a discounted

rate.

1.3.4. PCS auctions

 

1.3.4.1. Principle

Spectrum management authority in the US. is shared between the FCC and the Executive
Branch. The FCC allocates and assigns frequencies for use by private and commercial
entities other than the federal government. In the Omnibus Budget Reconciliation Act of
1993, Congress authorized the FCC to use competitive bidding procedures to award
certain electromagnetic spectrum licenses. Previously, the FCC used either comparative
hearings or lotteries, processes which caused administrative and judicial delay and
deprived the public from the value of the spectrum. With competitive bidding the spectrum
would go to the individual entity who values it most highly and who therefore would use
the spectrum in the most eflicient and extensive manner. The auction process also
presented the advantage of creating revenues for the US. Treasury. The method adopted

for the broadband PCS was simultaneous multiple round auctions.

1.3.4.2. Results of broacmmd PCS auctions

0 Block A & B (December 5, 1994 - March 13, 1995)

Auction Net Revenue: $7,034,240,010

23

Table 7 - PCS A&B Block Auctions Final Results: Top 10 high bids by bid size

 

 

 

 

WrrelessCo L. P.

S2, 110, 079,168

 

AT&T Wireless PCS Inc.

$1,684,418,000

 

PCS PRIMECO,

L.P.

$1,107,226,000

 

Pacific Telesis Mobile Services

$695,650,000

 

GTE Macro Communications Co

$398,261,451

 

American Portable Telecommunications

$288,872,034

 

Ameritech Wireless Communications

$158,100,000

 

 

 

 

Western PCS Corporation $144,208,262
Powertel PCS Partners. LP. $124,447,000
PhillieCo, L.P. $84,995,012

 

 

HWQNOOANt—t

 

 

Source: FCC.

Table 8 - PCS Block A&B Auctions Final Results: Top 10 Markets by Net $/POP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MTA BTA Market Net $/POP High Bidder Net High Bid
3 B Chicago $31.80 PCS PrimeCo $385,050.583
3 A Chicago $30.88 AT&T Wireless PCS $372,750,000
11 A Atlanta $28.58 AT&T Wireless PCS $198,750,000
24 A Seattle $27.79 GTE Macro $198,411,000
24 B Seattle $27.48 Windsong Comm. $106,355,002
10 B Washington $27.23 AT&T Wireless PCS $105,163,484
11 B Atlanta $26.60 GTE Macro $184,660,483
2 B Los Angeles $25.78 Pacific Telesys Mob. $493,500,00
15 A Miami $25.64 Windsong Comm. $131,723,000
19 A St Louis $25.48 AT&T Wireless PCS $118,836,000
Source: FCC.

0 Block C (completed May 6, 1996)

Auction Net Revenue: $10,216,596,324

 

24

Table 9 - PCS C Block Auction Final Results: Top 10 high bids by bid size

 

...............................................................................
............................................

...............

 

   

 

 

....... .., - t . .. - . . .3 .'. '.' .....
....... ......... . .. .... ”h"... . ... ........... . .... .. .... ... . .....-
............................................................................ a...................

 

 

 

 

 

 

 

 

 

 

 

 

cations Inc. $4,201,186,654
DCR PCS, Inc. $1,426,762,891 43
Gwi PCS, Inc. $1,059,657,750' 14
BDPCS, Inc. $873,783,913 17
Omnipoint PCS Entrepreneurs, Inc. $509,133,256 18
PCS 2000, LP. $344,293,125 15
Chase Telecommunications L.P. $175,090,520 11
let Century Telesis Joint Venture $98,192,838 17
Carolina PCS 1 Limited Partnership $92,660,091 9
Aer Force Communications, L.P. $87,336,004 12

 

 

Source: FCC.

Table 10 - PCS C Block Auction Final Results: Top 10 markets by Net$/POP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MTA BTA Market Net $/POP High Bidder Net High Bid
47 222 Kahului, HI $77.13 CH PCS, Inc. $7,752,000
25 491 US Virgin Is. $76.45 Windkeeper Comm. $7,797,750
27 347 Phoenix, AZ $73.92 BDPCS $177,768,000
24 413 Seattle, WA $73.50 BDPCS $199,111,635

7 101 Dallas, TX $67.21 DCR PCS ' $291,023,250

2 245 Las Vegas NV $66.58 DCR PCS $57,118,576

4 389 Sacramento, CA $65.70 GWI PCS $108,832,500

47 192 Honolulu, HI $64.09 DCR PCS $53,594,250

24 331 Olympia, WA $63.81 BDPCS $16,524,000

4 372 Reno, NV $63.29 PCS 2000 $27,802,575
Source: FCC.

0 Block C Re-auction (July 3 - July 25, 1996)

Auction Net Revenue: $904,607,467

Re-auction of the 18 licenses defaulted on by BDPCS and National Telecom PCS, Inc.

 

25

Table 11 - PCS C Block Re-Auction Final Results

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

$542,461,396

CH PCS, Inc. $213,807,750 1
Magancom Wireless, L.L.C. $108,519,750 5
Mountain Solutions, Ltd, Inc. $23,619,778 2
Cook Inlet Western Wireless PV/SS PCS $9,202,500 1
Redwood Wireless Corporation $6,826,043 1
Westel, L.P. $170,250 1
Source: FCC.

0 Block D, E, F: Auctions began on August 26,1996 and are still being held.

1.3.5. Technology and standards

1.3.5.1. How PCS works

As we have noted already, PCS is nothing but cellular in a different frequency band. As a
matter of fact, PCS systems operate at higher frequencies —1900 MHz instead of 850
MHz. PCS systems use digital technology. Because of the higher frequencies and the use
of the new digital technology, PCS systems use the spectrum more efficiently and operate
at lower power levels. Because of the digital technology, they can offer advanced services

not available on the analog cellular systems, and transmit clearer calls.

In the absence of a standard set by the FCC, many technologies are open to PCS licenses.
As a matter of fact, PCS has thirteen different air interfaces, yet in the US most carriers

have chosen either CDMA, TDMA or GSM. We will study the standardization issue in

details in the following paragraph. It is important to note however that some technologies

26

have adopted a microcell approach, meaning that instead of providing broad coverage
similar to cellular, they will deploy smaller cells for a patchwork kind of coverage. In
order to cover entire urban areas, the carriers can increase the number of these cells,
deploy an overlay or layer of cell sizes or interconnect with other carriers. A combination
of macrocells, microcells and picocells can provide ubiquitous coverage and support
different ranges of mobility. Microcells will provide primary coverage to serve high
density on-street traffic areas, macrocells will provide extended radio coverage and

picocells will support indoor wireless communications.

Cellular systems also have evolved toward microcells in an attempt to increase capacity in
areas of high user density, to improve coverage of shadowed areas, to lower transmitter
power, and to have lower complexity base station. However, because PCS operates at

higher frequencies, they have made microcells more attractive.

Different technologies will respond to different needs of PCS providers. From the
provider’s point of view, the needs, objectives and constraints can be expressed in terms
of mobility, coverage, roaming, demographics of markets, etc. The corresponding
technologies can be divided in two groups: high-tier and low-tier systems. Low-tier
systems using microcells will be appropriate for high density areas. Two low-tier systems
have been developed in the US: WACS (Wireless Access Communications System) and
PACS (Personal Access Communications System). High-tier systems will be more
appropriate for high-speed mobility, and wider coverage areas. High-tier systems are PC S-

1900, 18136 (Digital AMPS), IS95 (CDMA).

27

1.3.5.2. Standards

There are a number of standard setting organizations and likewise there are many issues
concerning standardization in the field of wireless communications, such as how to design
the systems for keeping track of calls for billing purposes. However the most debated
issue is the standard for PCS multiple access technique. The PCS Primer illustrates this
issue: “The digital PCS and cellular standard committees have not agreed on one common
standard. Instead they have agreed on a number of choices. In other words, they have
agreed to disagree.” The competing technologies for multiple access of broadband PCS
and cellular are FDMA, CDMA and TDMA . Each of these technologies gives rise to
many different standards. Whereas some parts of the world use TDMA for their GSM
standard, the standard modified to work at US PCS frequencies is called PCS-1900.
Another standard for TDMA in the US is IS-136 TDMA. These standards vary in channel

size and method for call splitting over time.

The FCC has decided that it would not adopt any particular standard for air interface for
PCS, leaving it up to the standard setting bodies of the industry to collaborate on the
major issues of interoperability and roaming. As a result, the absence of nationwide
technology standards gives rise to endless debates as was noticeable in the presentations
by various equipment manufacturers and service providers at the National
Communications Forum in Chicago in October. Discussions raged over the myriad of new
technologies during these presentations; at the heart of every discussion was the
uncertainty over which of these new technologies will eventually dominate the industry.

While GSM and CDMA advocates would all have figures proving that their technology is

28

dominating in the market, others decided to avoid the issue arguing that there was no best

technology but only a right technology for each individual business plan.

Each of these different technologies have their set of problems. For instance, while CDMA
had a late start it is now catching up and holding tremendous promise. However, since
most of these technologies are still evolving and since most of the discussions about them
are biased, it is very difficult to assess their relative strengths and weaknesses. We will see
later on the consequences of the technology issue on the competition in the PCS industry.
It appears that while technology has been driving the industry it should not take a central
role in the firture: “digital is an enabler to competition” says Tom Elliott from Arthur
Andersen’s Communications Industry Practice (reported by P. Rubin). And according to
Peter Bernstein, “It is time to end the digital war. The technologies all work; they are all
an improvement over analog cellular. Digital access methods will be of no significant

consequence —except possibly to roaming users— by year-end 1997”.

1.3.6. Differences between cellular_and PCS

We have seen that the question of the difl'erences between cellular and PCS is a very
controversial one. However, let’s try and outline unbiased differences between the two
services.

The PCS Primer notes five basic differences between PCS and cellular. 1 will list them here
as well as outline some important underlying issues.

0 The market areas. Whereas cellular markets are based on Metropolitan Statistical

Areas (MSA) and Rural Service Areas (RSA), the FCC defined market areas for PCS

29

based on the Rand McNally BTAs and MTAs. Some PCS areas are larger and
encompass major economic center. According to the PCS Primer, this was done to
encourage the development of regional and national services.

The initial digital technology. Unlike cellular which is evolving from cellular to digital,
PCS systems are digital from their inception. Although my point at this stage of the
study is not to weigh the relative advantages of PCS and cellular, I will outline an
important consequence of this technological difference. On the one hand cellular
providers have an advantage because of their existing customer base. On the other hand,
PCS have an advantage because they don’t have the constraints of having analog
cellular customers. As a matter of fact, cellular providers migrating to digital have
obligations to maintain sufficient conventional service to meet existing demand, which
makes the transition more difficult.

Weight of handsets. PCS Primer contends that PCS handsets are lighter than cellular.
This is not necessarily true now and is all the more difficult to assess as different PCS
and cellular systems impose very different constraints on the weight of the handsets. For
instance, PCS phones supporting different standards may be heavier. Similarly, cellular
systems supporting both analog and digital technology may be handicapped.
Transmission frequencies. While cellular operates in the 850 MHz, PCS operates in
higher frequencies, at 1900 MHz. This position of PCS in the spectrum has several
consequences. First it aligns broadband PCS with the international range for mobile
services which will impact the competitiveness of the US. on an international basis.
Second, because they operate at higher frequencies, PCS systems have different physical

characteristics that affect their performance, their operations, and their cost structure.

30

As a matter of fact, the higher frequency band allocated for PCS makes smaller
cells more attractive. Such cells, called microcells, require lower transmission power,
provide larger capacity than macrocells, and ubiquitous coverage in high density areas.
Unlike macrocells, predominantly used in cellular systems and supporting high speed
and vehicular mobility in large cells, microcells are good for urban, high traffic areas,
and indoor coverage. These differences induced by the frequency band allocated to PCS
has consequences in terms of network build out, costs, cell siting issues, but also on the
strategy and business plans of the service providers.

0 Service requirements within five years imposed by the FCC. The FCC requires that
within five years after the granting of broadband PCS licenses, the service providers
must reach specific benchmark for the availability of service: one-third of the population
in a 30 MHz license area, and one-fourth of the population in a 10 MHz license area
must have service available. Providers with 10 MHz blocks have an alternative —they
can demonstrate to the FCC “that they are providing substantial service.” There is also a
ten-year benchmarks: two-thirds of the population must have broadband services
available in this time frame (PCS Docket, Memorandum Opinion and Order, 11 155-156,

page 63).

More differences could be outlined between cellular and PCS, although some might be
little more than consequences of the previously noted differences. However I will try to
tackle some differences as well as highlight their limits. In an effort to stay unbiased, I will
focus on the intrinsic characteristics of PCS that make it firndamentally different from

cellular.

31

0 Network economics. Economic realities are very different for cellular and PCS
providers. PCS providers do not represent a homogenous group in that regard, each of
them facing different realities depending on the type of licenses they own, the size and
type of their markets, their technology choices, etc. However, for many reasons
including the issue of frequency allocation tackled earlier, PCS network economics are
clearly different from cellular. This will have important consequences on the strategy of
PCS providers, on their cost structure, etc.

0 Technology. We could argue that PCS offers better service, higher quality, more
features, less fraud, and so on. However, these technological improvements based on
the new digital technology can be deployed for cellular as well. As a result, I believe this
should not be stressed as a difference.

0 Timeline. What makes PCS and cellular look so different today is the time frame in
which they have been developed. Cellular providers are incumbents while PCS providers
are new entrants, creating a difference in experience, product or brand recognition,
deployment of networks, etc. As matter of fact, if PCS seems to provide more features
today, cellular on the other hand provides national coverage. And these differences most
likely will have disappeared within a few years. Contrarily, some economic realities
which tend to prove that PCS could compete with wired phones —for instance the
Wireless Local Loop— will lead to other fundamental differences which are still very

difficult to forecast today.

32

In conclusion, I would like to emphasize that although some differences exist between
PCS and cellular that are based on intrinsic characteristics of each, we have to be very
careful not to overestimate or underestimate them. To that purpose, we should take
particular care to be precise on what we are talking about, which is very difficult in a
domain in which names have very vague meanings. The following quotation exemplify the
likelihood of misunderstandings. “In spite of all the references to cellular, PCS should be
considered distinctly different. PCS must be viewed in terms of what it offers in vision and
in technology that cellular cannot. The benefits of PCS over cellular. PCS has several
advantages over existing cellular telephone service. They include better service quality
through the use of digital technology, more compact radio interface equipment, increased
mobility, enhanced service features and price.” This would be accurate if we compared the
PCS of tomorrow and cellular of yesterday. In other words, this is denying the evolution
of cellular and assuming that the expected potential of PCS is achieved already. To put it
in a nutshell, only meaningful comparisons based on intrinsic attributes of each of the
services studied in a dynamic environment will provide some basis for the analysis of

the mobile communications market place.

1.3.7. The PCS market

1.3.7.1. Perspective

PCS being in its infancy, we can make industry projections but there is not past to look at.
As a matter of fact, no more than four providers have made their service commercially

available, and as a result, there is not much data about the market yet. Furthermore, we

must be cautious not to be influenced about subjective opinions coming from over-

enthusiastic participants in the industry.

The early success of PCS caused analysts at Donaldson, Luflcin and Jenrette to revisit their
market projections and adjust their wireless estimations upward. By year-end, the
company expects PCS subscribers to total 245,000 and then jump to nearly 2.8 million by
the end of 1997. By 2004 or 2005, DL&J predicts a slightly larger incremental market

share for PCS operators than for cellular.

 

 

Subscribers (millions)

 

 

 

 

 

Figure 1 - US. Wireless Communications Industry - Basic Penetration Model

Source: Donaldson, Lufldn and Jenrette

The projection for market grth is based on the assumption that prices will decrease in
the industry due to increased competition and lower costs structure thanks to the new
technologies. As a consequence, the cellular market will shift from a business-oriented to
a consumer market. A study by Deloitte and Touche shows that the average revenue per

wireless customer will decrease overtime. This issue will be very important in terms of

34

competitive analysis and strategy formulation. Strategies will be very different fi'om what
they used to be in the duopolies. “The bottom line seems to be that there’s a very strong
orientation toward understanding the market and being responsive to customer

needs.”

 

   
 
 
 

—I— Minter of w ireiess
smscribers
+ Average revenue

per subscriber

 

 

 

1984 1987 1990 1993 1996 1%9 2002 2005

 

 

 

Figure 2 - Combined Cellular and PCS Demand in the US. (1984—2005)

Source: Deloitte & Touche

Note: Number of subscribers in millions and average revenue in dollars per subscribers per
month.

Finally, it is very important to keep in mind that PCS customers will not be only cellular
users. The study concludes that marketing efforts must extend beyond traditional

boundaries. “It focuses on taking the wireless market to the next level —going from

cellular customers to a much broader range of people.”

1.3.7.2. Players
The players in the PCS market are the companies who have been awarded licenses in the
A&B, and C block. 18 licensees own the 102 licenses of the A&B blocks. However, some

companies who appeared as separate bidders in the auction have then created alliances

35

that make them even stronger players. For instance Sprint PCS which appears as the
biggest player in the market is a venture of Sprint, Comcast, Cox and TCI. Furthermore,
competitors in the market change names regularly, which makes it all the more difficult to
keep track of who is who. For instance, Sprint recently changed its name from Sprint

Spectrum to Sprint PCS.

Table 12 - Top 8 A&B-Block licensees by POPS.

 

 

 

 

 

 

 

 

 

 

Company Name POPS (1) # of licenses Net Bid Average Price
(M) (SM) ($ / POP)
Sprint PCS 182.4 33 $2,] 10(2) 14.56
AT&T Wireless 107.1 21 $1,684 15.73
PCS PrimeCo 57.2 11 $1,107 19.36
Pacific Bell Mobile 31.0 2 $695 22.4]
American Portable Telecom 25.9 8 $288 11.1]
GTE Macro 19.4 4 $398 20.56
Western Wireless 13.7 6 $144 10.50
Powertel PCS 9.0 3 8124 13.85

 

 

 

 

 

 

(1) POP: Potential subscribers in millions.

(2) does not include the cost of its two pioneer’s licenses.

Source: FCC.

There are about a hundred licenses in the C-Block. As for A&B, the bidders have then

formed alliances and sometimes changed names. On top of that 18 licenses of the C block

have been re-auctioned after they were defaulted on by their initial bidders.

The major players in the C block after the re-auction, ranked by POPS are:

36

Table 13 - Top 4 C-Block licensees by POP.

 

 

 

 

 

 

 

 

 

 

 

Company Name POPS # of licenses Net S B S / POP
Nextwave 102.6 63 $4,743 46.22
DCR PCS 33.6 43 $1,426 42.44
GWI PCS 17.9 14 $1,059 59.16
Omnipoint 13 18 $873.8 39.16
Source: FCC.

Nextwave was awarded 7 licenses in the re—auction and BDPCS disappeared.

The PCS competitors have very diverse background and strategies. While A&B licensees
are mostly big companies; some seek national coverage while others have regional
strategies. This is reflected by their attitude in the auctions process. In the C-block, the
companies are more diverse. They are entrepreneurs. Among the biggest bidders we find

some companies supported by foreign equipment manufacturers (such as Sony or LC

Group).

 

Chapter 2

STRUCTURE AND CHARACTERISTICS OF THE CELLULAR INDUSTRY

2.]. Theory: The Structural Analysis of industries by M. Porter.

2.1.1. Context of strategy fomLhrjion

 

 

The formulation of competitive strategy has to be related to a company’s environment.
Studying the environment is a large task including looking at social and economic factors.
However, the first and most important step is to analyze the industry in which the

company competes.

2.1.2. Stmctugal determinants of the intenaity of competition

According to Porter, the intensity of competition in an industry is rooted in its underlying

economic structure and goes well beyond the behavior of current competitors. It depends

on five basic competitive forces which determine the profit potential in the industry. Profit

potential is measured in terms of long run return on invested capital.

37

38

0 Definition of the industry
Porter adopts the working definition of an industry as the group of firms producing

products that are close substitutes to each other.

0 The five competitive forces

The five competitive forces —entry, threat of substitution, bargaining power of buyers,
bargaining power of suppliers and rivalry among current competitors— exemplify a
competition that goes well beyond the established players. The combination of these
forces determines the intensity of industry competition and profitability. However, a
company will take into account the strength of each force taken separately to formulate its
strategy.

Each firm will have a different set of strengths and weaknesses in dealing with industry
structure. This structure will change over time. However, understanding industry structure

is the starting point for strategic analysis.

Other short run factors may have some tactical significance. However, the structural
analysis must focus exclusively on the basic characteristics of an industry rooted in its
economics and technology. Porter analyzes the important economic and technical

characteristics of an industry that are critical to the strength of each of the five forces.

39

2.1.2.1. Threat ofentry

 

The threat of entry into an industry depends on the existing barriers to entry, coupled with
the expected reaction from current competitors. If barriers are'high and/or the newcomer

can expect sharp retaliation from entrenched competitors, the threat of entry is low.

Major existing barriers to entry:

0 Economics of scale: “economies of scale refer to declines in unit costs of a product (or
operation or function that goes into producing a product) as the absolute volume per
period increases”. To avoid repetition, the term “product” refers to “product or
service”.

:>Barrier: If entrants choose to enter at a large scale they risk to face a strong reaction
from the established players. If they choose to come in at a small scale, they will face a
cost disadvantage. Scale economies can be found in every function of a business.

0 Product differentiation: “Product differentiation means that established firms have
brand identification and customer loyalties which stem from past advertising, customer
service, product differences or simply being the first into the industry.”

:>Barrier: Entrants will have to make important investments up-front to take customers
away from the existing competitors. This effort in building a brand name will be long
and risky.

0 Capital requirements: “the need to invest large financial resources in order to

compete”.

4O

:>Barrier: This is all the more deterring if the investment is risky or unrecoverable.

0 Switching costs: “one-time costs facing the buyer of switching from one supplier’s
product to another”.

:>Barrier: Entrants must offer significant cost or performance improvement to justify the
switch.

0 Access to distribution channels: Access to distribution channel can be difficult if they
are already saturated with existing products or if distributors have strong relationships
with their suppliers.

:>Barrier: Entrants will have to spend money and efforts to gain access or they will have
to create their own distribution channels.

0 Costs disadvantages independent of economics of scale: “Established firms may have
cost advantages not replicable by potential entrants no matter what their size and
attained economies of scale”. Among them: proprietary product technology, favorable
access to raw materials, favorable locations, government subsidies, learning or
experience curve.

0 Government policy: Government can limit or even foreclose entry to industries with

such controls as licensing requirements and limits on access to raw materials.

Expected retaliation can be estimated according to a few signals:
0 History of retaliation in the industry;
0 Resources of incumbents to fight back;

0 Incumbents with commitments to industry and illiquid assets;

4]

0 Slow industry growth.

The threat of entry into an industry can be summarized by the concept of “entry
deterring price: the prevailing structure of prices which just balances the potential
rewards fiom entry with the expected costs of overcoming structural entry barriers and
risking retaliation”. Yet the conditions determining the barriers to entry change. The
reasons for change can be outside the firrn’s control or not, and different firms have

different abilities to overcome them.

2.1.2.2. Intensitvfi of rivalg amoryg existing competitors

Intensity of rivalry depends on a number of interacting structural factors:

0 Numerous or equally balanced competitors: The probability of presence of mavericks
hoping to go unnoticed increases with the number of competitors. Equally balanced
competitors create instability as they fight each other and no discipline is imposed by a
few leaders.

0 Slow industry growth: creates a market share competition more volatile than a growth
situation where efi‘orts are concentrated on industry expansion.

0 High fixed or storage costs: creates pressure to fill capacity and cut prices when excess
of capacity is present.

0 Lack of differentiation or switching costs: creates pressure for intense price and
service competition and thus volatility.

0 Capacity augmented in large increments: creates chronic over capacity and price

cutting situations.

42

o Diverse competitors: With diverse strategies, origins, and relationships to parent
companies, competitors will have different goals and competitive strategies and may
“continually run head on into each other in the process”. This lack of homogeneity will
create confusion and difficulties to set the rules of the game for the industry.

0 High strategic stakes: Firms having high stakes in achieving success increase the
volatility of rivalry. Their diverse goals and potential willingness to sacrifice profitability
will destabilize the industry.

0 High exit barriers: they are economic, strategic and emotional factors which prevent
competitors from leaving the industry even though they are not profitable anymore.
Some examples are: specialized assets, strategic interrelationships, emotional barriers,
government and social restrictions. High exit barriers can affect the profitability of the
entire industry.

Like entry barriers, rivalry changes and can be impacted by a company’s strategic

decisions.

2.1.2.3. Pressure from substitute products

All firms in an industry are competing, in a broad sense, with industries producing
substitute products. Substitutes limit the potential returns of an industry by placing a
ceiling on the prices firms in the industry can profitably charge. The impact of substitutes
can be summarized as the industry’s overall elasticity of demand. Substitutes are products
that can perform the same fiinction as the products in the industry and can come from
businesses far removed from the industry. Sometimes collective action is undertaken by

the industry to position itself vis-a-vis substitutes.

43

Substitutes that are subject to trends improving their price-performance tradeoff with the
industry’s product or that are produced by industries earning high profits have to be

watched closely.

2.1.2.4. Bargaining power of buyers
Buyers also compete with the industry in what Porter calls an “extended rivalry”. They
bargain for lower prices, higher quality and better service and play competitors against

each other. This harms the industry’s profitability.

The power of buyers depends on their market situation and the relative importance of their

purchases from the industry compared with its overall business. The following

circumstances are sources of power for a buyer group:

0 It is concentrated or purchases large volume relatives to seller sales.

0 The product it purchases from the industry represents a significant fraction of the
buyer’s costs or purchases.

0 The product it purchases from the industry are standard or undifferentiated.

o It faces low switching costs.

0 It earns low profits.

0 Buyers pose a credible threat of backward integration.

0 The industry’s product is unimportant in relation to the quality of the buyer’s products

or services.

44

o The buyer has firll information.

These sources of power can be attributed to consumers as well as to commercial and
industrial buyers. Only the frame of reference has to be modified. Consumers for instance
will be more price sensitive for products that are undifferentiated, expensive relative to

their income or when quality is not very important to them.

Time and strategic decisions can alter these factors and the resulting power of buyers.
Buyer selection which consists of choosing buyers that have the least influence can
improve a company’s strategic position. The bargaining power of buyers has to be viewed

as a crucial strategic issue.

2.1.2.5. Bargaining power of suppliers

Suppliers also compete with the industry. They bargain to impose higher prices or lower
quality for their products. When participants in the industry can not recover these cost
increases by raising their prices, the industry’s profitability decreases. The following
circumstances are sources of power for a supplier. They tend to mirror those listed for
buyers’ power.

0 It is dominated by a few companies and is more concentrated than the industry it sells

to.

o It is not obliged to contend with other substitute products for sale to the industry.

45

o The industry is not an important customer of the supplier group.
0 The supplier’s product is an important input to the buyer’s business.
0 The supplier group’s products are differentiated or it has built up switching costs.

0 The supplier group poses a credible threat of forward integration.

Like the power of buyers, suppliers’ power changes and is often out of the firrn’s control.

However, a company sometimes has the ability to improve its situation toward suppliers

thanks to strategic decisions.

2.1.2.6. Government as a force in industry competition

 

 

Government as a supplier or a buyer has a strong potential to influence industry
competition. As a regulator, it can affect the position of the industry vis-a-vis substitutes.
It can also affect rivalry among competitors by influencing industry growth, the cost
structure, etc.

Porter highlights the impact of government policy on competition. However, he prefers to
analyze how governments affect competition through the five competitive forces rather

than consider it as a force in itself.

2.2. Structural anaysis of the cellular services industry

2.2.1. Industry definition

To introduce his framework for Structural analysis, Porter chose the working definition of

an industry as “the group of firms producing products that are close substitutes for each

46

other”. Yet he notes that in practice, there is often a great deal of controversy over the
appropriate definition, centering around how close substitutability needs to be in terms of
product, process, or geographic market boundaries.

Defining the relevant industry is a crucial step in competitive strategy formulation and the
debate over it is mostly motivated by a fear of overlooking latent sources of competition.
Yet according to Porter, because structural analysis looks at “extended rivalry” and goes
well beyond existing competitors, the decision of where to draw the boundaries becomes
more or less irrelevant to strategy formulation.

Porter also notes that definition of an industry is not the same as definition of where the
firm wants to compete (defining its business). This distinction eliminates needless

COl’lfilSIOII in drawing industry boundaries.

2.2.1.1. The wireless communications industry

In a competitive analysis of the cellular communications industry which dates back to
1993, the OTA maps the communications industry presenting PCS as a subset of cellular
telephony. This presentation may be challenged and would most likely be different today.
Chances are that PCS would appear at the same level as cellular telephony and be a new

subset of the wireless communications industry.

Two main reasons account for the endless debates about how to map the wireless
communications industry. First, as I said in Part I, there is no single definition of PCS.
Second, wireless communications is a very complex industry which is very difficult to

segment.

47

In a paper entitled Cellular to PCS: A Wireless Primer, the Telecommunications Industries

Analysis Project presents the potential range of competitors and technologies for wireless

services in 1994 as follows:

Table 14 - Potential range of competitors and technologies for wireless services.

 

Source: PCS Primer.

 

 

 

 

 

 

 

 

 

 

 

Spectrum allocation: Type of technology: Analog or Digital
806-824 MHz TDMA Analog
900-901 MHz

Packet-Switched Digital
Radio
Cellular Analog
824-849 MHz Microwave
869-894 MHz TDMA Digital
CDMA
1850-1900 MHz TDMA, CDMA, Digital
GSM
901-902 MHz CDMA Digital
930 MHz
940 MHz
1610-16265 MHz TDMA, CDMA, Digital
2483-2500 MHz LEO Satellite
3.7-4.2 GHz G50 and LEO Digital
5925-6225 GHz Satellite
11.7-12.2 GHz
14-14.5 GHz
2500-2690 MHz Microwave Digital
28 GHz 1mm wave/ Digital
Microwave,
Microcellular

 

 

 

 

48

Donald C. Cox highlights the difficulty of segmenting the wireless communications
industry. “There are many different ways to segment the complex topic into different
applications, modes, functions of coverage, extent of mobility [Cox, 1992; Padgett,
Hattori, and Gunther, 1995]. The complexity of the issue has resulted in considerable
confusion in the industry, as evidenced by the many different wireless systems,

technologies, and services being offered, planned or proposed.”

Rather than looking at the different wireless systems and technologies, Cox proposes a

segmentation method based on competing mode of communications.

Table 15 - Segmentation by mode of communication.

 

 

Description Represented by:

 

communication by way of voice mail, fax, email
message transmission,
storage and retrieval

 

telephone, cellular mobile
radio telephOne;
interactive text (and
graphics) exchange over
data networks;

2-way video phone?

 

broadcast with no return Like a ringer on a phone
channel, alerts a paged party w/o the capability for
that someone wants to completing the
communicate with him. communication

 

high-level software
application, finds
information in data network
32.22;: and returns it

 

 

 

 

Source: Cox.

 

49

Many different segmentation methods can be used based on buyers’ needs and
preferences. According to Cox: “what is being sought by users, and produced by

providers, can be categorized according to the following two main characteristics:

0 Communications portability and mobility on many different scales:

* Within a house or a campus (cordless telephones, WLAN S)

* Within a campus, a town, or a city (cellular radio, WLANs, wide area wireless
data, radio paging, extended cordless telephone)

* Throughout a state or a region (cellular radio, wide area wireless data, radio
paging, satellite-based wireless)

* Throughout a large country or a continent (cellular radio, paging, satellite-based
wireless)

* Throughout the world?

0 Communications by many different modes for many different applications:
* Two-way voice
* Data
* Messaging

* Video?”

The wireless communications industry is undoubtedly a very complex one. Furthermore,
its complexity is likely to increase as technologies are converging and businesses are

becoming more global. However, for the purpose of the analysis it is necessary to agree

50

upon which segment of the industry we will focus and clearly define that segment. Porter’s
theory for structural analysis gives us a relative freedom regarding where we want to draw

the boundaries of the industry.

2.2.1.2. Bounda.:ries of the cellular communications industry for the purpose of the am
An activity or segment of an industry is a subdivision of the industry that is more
homogenous in terms of purchase behavior, costs structures, technical constraints, etc.
Our goal here is to define the segment of the wireless communications that will be most
' relevant to the purpose of our study —to analyze the entry strategies of PCS operators in

the wireless communications industry.

The segmentation method presented by Cox based on modes of communications does not
enable us to identify segments relevant for our study. As a matter of fact, PCS offers the
different modes of communications (messaging, 2-way voice, paging) all-in-one. Yet,
Cox’s segmentation method based on portability, mobility, communications modes, and
applications seems more appropriate. If we look at the range of potential competitors in
the wireless industry and use a chain of substitutability, we can define “a group of firms
producing products that are close substitutes for each other” which is the definition of an

industry in Porter’s framework.

We can apply Cox’s segmentation method to the range of competitors listed by PCS

Primer:

51

Table 16 - Segmentation of wireless communications.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

portability/mobility modes/applications
Broadband PCS state or region (today) 2-way voice (quality)
+ paging
+ messaging
Cellular tel. digital country or continent 2—way voice (quality)
Cellular tel. analog country or continent 2-way voice
ESMR region 2-way voice
Cordless limited to a house or campus 2-way voice
Narrowband PCS state or region paging, messaging
Paging country or continent paging
Messag'nL country or continent messaging
Satellites country or continent
MMDS not available
LMDS not available

 

 

 

Source: Own construct.

 

 
  

 

Emily
[Brgdband I

 
  
 
 

Wireline

 

 

 

 

[Narrowband

 

l

  

Figure 3 - Chain of substitutability.

Source: Own construct.

  
  
      
  

  
 

   
    

52

All of the services cited above are potential substitutes for each other. We could have also
included wireline services for which PCS is a potential substitute. However, according to
our criteria for segmentation, the closest substitutes to broadband PCS are the existing
analog and digital cellular services. Narrowband PCS which offer mostly paging and

messaging services are competing in a different segment.

AS a result, the boundaries of the industry under analysis will comprise analog and digital
cellular telephony services and broadband PCS. In Porter’s framework for structural
analysis they will be the “industry competitors”. The rest of the wireless services will be

the “substitutes”.

We have seen in Part I the confusion that reigns around the term PCS. PCS is cellular,
only in a frequency band different from that of the existing cellular carriers. As a result, the
industry we are looking at is the cellular communications industry. However, when we
talk about the players, cellular will refer to the existing cellular carriers in the 800MHz

frequency band and PCS will refer to the new licensees in the 1900MHz frequency band.

2.2.2. Industry fomnd environment.

It is necessary before starting the structural analysis of cellular communications to note the
particularities of the industry form. First, to participate in the industry —which is
regulated by the Federal Communications Commission— one needs to own a cellular

license. Second, the number of licenses are limited and each license covers a Specific

53

geographic area. As a result, competition for cellular in the US is not homogenous and all
players do not compete against each other. Rather, competition will be defined on a per’
market basis. In each geographic market, the cellular and PCS licensees will compete
against each other and against their substitutes. In the markets where they cannot compete
—the markets where they do not have licenses— some players seeking extended coverage
may form partnerships with their so-called competitors. Other competitors may pursue
different strategies such as providing regional coverage only thus choosing not to interfere

in markets outside their licensed areas.

Another particularity of the industry is that although all the licenses have been awarded
(two for cellular and six for PCS in each market), all potential competitors have not really
entered the market yet. Today, only three of the PCS licensees in the A and B blocks have
made their services commercially available. Most of the other licensees in the A, B and C
blocks have started building their network and have announced the commwcial launch of
their products. The D, E and F block auctions are still being held. As a result, all these
licensees are not really “current competitors” but still more than “potential competitors”.
We will tackle this issue later as we consider the threat of new entrants and the rivalry
among current competitors. For the purpose of the analysis these impending competitors
will be considered as existing players. Yet we will keep in mind that the strategies they are
developing are “entry” strategies.

Other particularities of the industry environment will be outlined as we analyze in more
details the characteristics of emerging industries from the standpoint of strategy

formulation.

54

2.2.3. Forces of competition

2.2.3.1. Entry barriers

There are two ways to consider the threat of entry in the cellular business today. The first
one consists in saying that the industry is regulated by the FCC and one needs a license to
enter the industry. As a result, threat of entry is null today since all PCS auctions have
been completed and no additional spectrum is planned to be allocated for cellular services.
However, this should not exclude the possibility of new spectrum allocations to be decided
by the FCC in the firture.

The second approach also consists in looking at the cellular communications industry
today. Yet this time we will look at the active players in the industry that is to say the
companies who have made their services commercially available. All PCS licensees that
are currently building their network and preparing for commercial launch can be
considered as potential entrants in the industry. They represent a threat to the incumbents.
However, as I said earlier, they are —at least for most of them— more than potential
entrants. They have overcome the regulatory barrier and are in the early phase of their

entry in the industry.

No matter where we draw the boundaries —once again, Porter’s theory sets us free-— the
impending competitors will have to work their way to obtain a market share. The threat of
entry is limited to a certain number of competitors and the incumbents know who they are.
But the barriers to entry are double: once the regulatory one has been overcome, the

Structural barriers remain for the entrant to overcome.

55

As shown by the early failure of some of the C-block winners to pay for their licenses and
their resulting elimination of the industry, it appears that not all of the entrants will

materialize as competitors.

Major entry barriers in the cellular industry other than the regulatory one.
0 Capital requirements are a major banier to entry in the cellular industry. They are
composed of three elements:

* Cost of licenses. Radio spectrum for cellular use is allocated to carriers by the FCC.
While the first licenses for cellular were distributed at very low prices in the mid
1980s, the new auction process decided by the FCC in 1993 for the allocation of
additional radio spectrum for commercial use was designed to generate the highest
revenues for the government. As a result, entering the market required very
important investments to acquire the licenses. For the A & B blocks, the price for
licenses had to be paid as the licenses were awarded while licensees in the C block
have the possibility to pay back over a ten year period. The 18 companies in the
A&B block have paid $7.7 billion for 99 licenses. In the block C, the price per pop
reached $50.

* Network and operations set-up costs: PCS service providers entering the industry
have to face very important costs to build out their network. PCS systems which are
characterized by a larger number of smaller cells —compared to cellular— will have
to set up radio equipment and networking equipment. Support operations for billing
and customer service will also have to be established. This represents very high

investments and the capital requirements are all the more important as the networks

56

have to be built very rapidly. Although PCS infrastructure is cheaper than cellular, its
cost remains a high barrier to entry. Estimated buildup costs range from $17 to $32
per pop according to Lucent Technology. PrimeCo for instance has spent $31 per
pop, excluding the cost of the licenses, against $17 originally budgeted.

* Relocation of incumbents. The spectrum allocated for PCS was previously reserved
for microwave use by pipeline companies and public utility services. PCS licensees
moving in are responsible for negotiating with the incumbents and must pay them to
put them somewhere else. This constraint happens to be even more costly than
initially expected. As a matter of fact, some incumbents which Jason Meyers calls
“the pirates of PCS” are taking advantage of their potentially lucrative position.

0 Economics of scale. As in any telecommunications network, economies of scale are
very important. Fixed costs for infrastructure deployment are very high. Once the
network is installed, every additional customer or minute of airtime generates revenues
at low marginal costs. Economies of scale will also be found in firnctions such as
marketing and promotion.

0 Product differentiation: “In a crowded communications marketplace, brand
recognition and loyalty will be the key.” In order to justify his statement Thomas Elliott
highlights the level of noise in the communications industry resulting from frequent and
intense competing marketing messages. This phenomenon urges confirsed customers to
choose the brand they know and stick with it. As a result, brand leadership becomes an
important barrier to new competitors. Yet many of the entrants in the cellular industry
already have brand names in other segments of the telecommunications industry. This

will ease their entry in the cellular market with reduced marketing costs.

57

Other structural barriers exist such as access to distribution channels, technology, or
experience. However, the most likely to deter potential competitors from entering the
market are the huge capital requirements and economies of scale. The re-auction by the
FCC of the licenses that where defaulted on in the C-block- proves that this financial

constraint has eliminated some players despite their efforts to enter the market.

Retaliation can be all the more vigorous as the existing competitors know who the
entrants are (because the result of the auctions are public, the degree of information about
the competitors is very high). Besides, they have been aware of their arrival for several
years and have had time to prepare. Furthermore, the incumbents have important
commitments to the industry and illiquid assets.

However, some factors may keep retaliation from being too severe. The industry growth
being very high, current competitors are more likely to concentrate their efforts on
increasing. their share of the expanding market rather than spend efforts to fight back new
entrants. Moreover, established players will have to face important challenges —such as
moving from analog to digital— to keep up with the competition of the PCS entrants. As
a result, chances are that they will not have the resources to fight back —with a price war

for instance.

As a conclusion, entry barriers are relatively high in the cellular market. The licensees
that have been given the legal right to enter the marketplace will have to overcome

important structural barriers to become a player and a winner. They will have to face some

58

retaliation fi'om the incumbents. However, the high industry grth will probably enable

many new competitors to successfully enter the industry.

The condition of entry in the cellular communications industry can be summarized thanks
to Porter’s concept of entry deterring price. The entry deterring price is defined as the
prevailing structure of prices which just balances the potential rewards from entry with the
expected costs of overcoming structural entry barriers and expecting retaliation. In the
case of the cellular industry, the very high entry costs are balanced by very high
potential rewards. Because of the spectacular growth perspective in the cellular industry,
the entry deterring price appears to be lower than the current price level and as a result

entry is occurring.

2.2.3.2. Rivalg amowisting competitors

According to our working definition of the industry and the boundaries we have drawn,
the existing competitors are the cellular and the broadband PCS operators. As many of the
PCS licensees are in the process of entering the market, the number of players is growing

daily.

0 Numerous competitors: There is a very large number of cellular and PCS licensees.
The cellular market is composed of ten major players and a large number of smaller
players. Similarly in PCS, although only 18 licensees shared the 102 A&B licenses, over

100 competitors share the 493 C block licenses. However, competition takes place on a

59

per market basis. In each market, there will be up to 8 competitors which is a significant
increase after the duopoly era. This large number of competitors is a source of volatility.
Diverse competitors. There are three major types of cellular carriers: long distance
carriers, RBOCS, and independent cellular carriers. Deregulation and the auctions for
PCS licenses introduced many new players in the field. Players are local and long
distance carriers, RBOCS, cable companies, independent carriers, international consortia
supported by foreign equipment companies, etc. These players differ by the nature of
their primary business, their size, their origins, their personalities, the importance of
their cellular activities relative to their overall business, their relationships to their parent
companies, etc. As a result, they have different goals, stakes, and strategies. This will
make it all the more difficult for the players to clearly understand their competitors’
intentions. The volatility of the competition will also hinder the establishment of “rules
of the game” in the industry.

Lack of homogeneity. Adding to the confirsion in the marketplace is the fact that
competition is not homogenous. Rather, because of the structure of the cellular industry,
competition will vary from market to market and from carrier to carrier.

High fixed costs. As we have seen earlier, fixed costs in the cellular industry are very
high. This will create a strong pressure for competitors to fill capacity. There is an urge
to gain customers which may lead to intense competition through price cutting or
intense marketing efforts.

High strategic stakes. The strategic stakes in achieving success in the cellular industry
vary fi'om canier to carrier. However, they will probably be high in most cases. Some

players will simply see the strategic stakes in being present in the fastest growing

60

segment of the communications industry. Other carriers may seek a presence in the
industry to firrther their overall corporate strategy —such as bypass of the local loop or
“one-stop-Shopping” marketing strategies. Such strategic stakes increase the intensity
and volatility of rivalry.

Lack of differentiation. The cellular communications market is an overcrowded and
noisy one. As a result, most consumers have difficulties understanding the differences
between the various products they are offered. In this situation, they tend to base their
choice on price and service which creates pressures for intense price and service
competition. These forms of competition are very volatile.

Lack of switching costs: Cellular subscribers used to face switching costs since they
were locked in long-term contracts with their providers. These switching costs will
decrease as PCS operators introduce the concept of subscription with “no strings
attached” as Sprint puts it. With immediate activation over the air and the absence of
long-term contracts consumers will give more attention to prices thus increasing the risk
of competitive warfare.

Rapid change and uncertainty in the industry. First, the cellular communications
industry is experiencing an extraordinary grth due to the govemment’s decisions to
expand the market and allocate more spectrum for commercial use. This artificially
stirred grth generates a pace of change in the industry that is difficult to keep up
with. Not only does this create a lack of visibility in the industry but also a great
technological uncertainty. As a matter of fact, competitors are forced to build or
upgrade their network as technology is being developed. As a result, competitors are

forced to take high risks since they do not know which technology will dominate the

6]

industry —and this is a critical issue for purposes of interoperability and roaming.
Finally, greater uncertainty stems from the fact that the cellular industry is developing in
the context of a newly deregulated telecommunications marketplace —although limited
competition already existed in cellular services.

This uncertainty which is characteristic of an emerging industry will be analyzed in more
details later.

0 The “PCS vs. Cellular” phenomenon. Another issue builds on the confirsion reigning
in the industry and increases the intensity of competition. We have seen in section I that
PCS is a term that remains very vague. No definition was really agreed upon and people
tend to use the words as best suit their interest. As a result, beyond a classic competition
opposing two rivals, a war is being fought yet without a clear understanding of who is
whose enemy. This war is mostly a marketing one. We will study it later as we come to
the issue of positioning the various cellular services as it relates to the different

competitors.

Exit barriers

The height of the exit barriers can be debated. On the one hand, the importance of the
initial investments made by cellular providers may represent a high exit barrier. On the
other hand, if we think in terms of sunk costs in case of exit, the barriers may appear
lower. Considering the pace of growth and the attractiveness of the industry, competitors
desiring to quit the industry should be able to sell most of their assets thus limiting their

sunk costs. Licenses can be sold and should find all the more buyers as they are a limited

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and indispensable resource. Investments in infrastructure may more difficult to recover yet
there are possibilities for resale.

My opinion is that, at this point in time, exit barriers are relatively low. However, the
degree of uncertainty is very high in this emerging yet fast growing industry. In other
words, for all the promises the industry holds, would there be a reversal of fortune in its
evolution for any unpredictable reason, the sunk costs of leaving the industry may become
enormous and the exit barriers very high.

Exit Barriers

Low High

 

Low Low, stable returns Low, risky returns
Entry
Barriers

High High, risky returns

 

 

Figure 4 - Barriers and profitability

Source: Porter, M.

At this point in time, we are in the best case from the view point of industry profits.
Because entry barriers are high and exit barriers are low, entry will be deterred and
unsuccessful competitors will leave the industry. However, we must keep in mind that this

situation may change as the industry matures.

In conclusion, many factors favor an intense rivalry in an industry that is expected to be
very profitable. Section IV will be devoted to the analysis of the forms that competition

may take.

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2.2.3.3. Pressure from substitute products

Identifying substitutes is a matter of searching for other products that can perform the
same fiinction as the product of the industry. While defining the boundaries of the cellular
communications industry, we have looked at the potential range of competitors in the
wireless industry. The chain of substitutability enabled us to determine how close each of

these competitors was to the cellular services.

ESMR has been identified as being the closest substitute to cellular services. As a matter
of fact this new technology developed by Nextel is experiencing an important growth.
ESMR offers services very close to those proposed by cellular and PCS providers (instant
conference calling, voice mail, and text messaging in one unit) and is a threat to the
cellular and PCS competitors. However, ESMR faces problems of spectrum scarcity and
the digitalization of the cellular and PCS networks threatens to negate the advantages of

ESMR carriers.

Porter tells us that the substitutes that deserve the most attention are those that (1) are
subject to trends improving their price-performance tradeoff with the industry’s product,
or (2) are produced by industries earning higher profits. None of the above seem to apply
to the case of ESMR services. Actually, ESMR, cellular and PCS have very similar cost
structures. Furthermore, the great uncertainty about technological developments in the
field of wireless communications make any significant and sustainable competitive

advantage based on technology very unlikely.

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Finally, because there is only one ESMR licensee per market, in which coexist two cellular
and six PCS licensees, ESMR appears to be just one more competitor. Although ESMR

competition has to be taken into account it does not represent a major threat.

Other competitors in the wireless market like satellite communications, paging, etc. can
also be considered as potential substitutes. However they do not answer the same
consumer needs and as a result do not exert a significant pressure on the industry. In
conclusion we can say that pressure from substitute products is medium. We could have
extended the analysis to the issue of the substitutability of cellular communications for
wireline services. According to many people, this is where the fiiture of cellular
communications is. However, this is more of a long term grth perspective. In the time
flame to which we are looking, wireline and wireless still appear as very remote

substitutes.

To put in a nutshell, at the time being, the pressure of substitutes is not very strong in this
fast-growing industry. However, we have to keep in mind that this situation may change
as rapidly as the industry evolves. And in the long term, the cellular industry may have to

fight against substitutes like copper wire.

2.2.3.4. Bargaining power of buyers
The buyers of cellular services vary from large business users to individuals for personal

use but there is no real powerful buyer group pressuring the cellular industry. However,

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some factors tend to make the buyers more price sensitive —at the expense of the

industry’s profitability. Although the buyers of cellular are not considered as consumers

yet, the industry is evolving in that direction.

0 The products are undifferentiated in the buyer’s mind. As we have seen already,
consumers are overwhelmed with contradictory marketing messages. Moreover,
purchasing cellular services implies very complex choices which make it all the more
difficult for buyers to understand the differences between the offers. What’s more, in
this high-tech industry, technology is transparent to the user. What matters to the
consumer is the features supported by the product, the quality, etc. However, they are
easily lured by technology arguments such as “digital quality” which are not always
accurate. Finally, the introduction of PCS for which no definition as been agreed on
increases the noise in the marketplace. All these factors increase the risk of competitive
warfare. Yet on the other hand, the lack of information or understanding of the industry
that the buyers suffer from, because of the noise, will diminish their poWer.

o The buyers face few switching costs which —as we have seen in the previous
paragraph— enhances their power.

0 The products are expensive relative to buyers’ income. This makes them very price
sensitive. However, because of technology improvements and the introduction of
competition, prices are expected to go down. As a matter of fact, the cellular industry is
targeting its expansion toward the mass market. On the one hand price sensitivity will
decrease as the products become less expensive, but on the other hand there is a risk of

increase of price sensitivity as the products becomes a commodity.

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In conclusion the buyers have some power yet this does not represent a major source of

competition in the industry. The bargaining power of buyers is still relatively low.

2.2.3.5. B_argaining power of suppliers

Cellular service providers need two kinds of supplies: network equipment and phones.
They can either get both from the same equipment manufacturer or choose different
suppliers. The suppliers can exert some power over the participants in the industry for at
least two of the reasons listed by Porter: the suppliers’ product is an important input to the
buyer’s business, and the suppliers’ product groups are differentiated or it has built up
switching costs.

Network equipment is more than just an input for the service providers. It will deterrrrine
their quality, cost structure, etc. As a result, it is very important to the buyer’s business.
Moreover, a vendor’s choice for network equipment or phones often reflects a technology
choice and switching costs are extremely high. Because of the technological uncertainty in
the wireless market, this issue is even more critical. However, although suppliers can gain
a significant power over the industry competitors, this phenomenon is reciprocal. A
service provider is usually a very important customer for the equipment manufacturers,
and losing him could be critical.

We can observe several trends in the market that will limit the competitive pressure from
the suppliers. First, the operators are evolving toward open architectures for their

networks. Second, they usually choose more than one equipment provider, which is made

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easier by the open architecture solutions. Finally, service providers insist on having

partnership relationships with their suppliers.

2.2.3.6. Government Mace in the industry

Needless to say that the government has a very strong influence on the level of
competition in the cellular industry. The government, through the decisions of the Federal
Communications Commission, almost determines the level of competition. Two landmarks
in the evolution of cellular communications exemplify the crucial role of the government.
Urged to reassess the level of competition in the industry, which was considered
insufiicient with the duopoly structure, the FCC decided in 1993 to increase competition
by allowing more players in the market. Later on the Telecommunications Act of 1996
opening the whole communications industry to enhanced competition also contributed to

increasing competition in the cellular industry.

Despite deregulatory trends, the wireless communications industry is and will remain
under control of the government. The FCC being responsible for the allocation of the
necessary radio spectrum resources it has the power to decide who will be allowed to play
in the industry. The government directly influences many aspects of the industry structure.
As the licensing authority, it has the power to pose absolute barriers to entry. The
regulation of the industry by the FCC also affects many of the components that determine

the rivalry among competitors.

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To conclude, the government plays a crucial role in determining industry competition for
the present and the future. However, as recommended by Porter, we do not consider
government policy as a force in itself. Rather, we consider how it affects competition

through the five competitive forces.

Conclusion: intense competition

Porter’s theory for the structural analysis of industries enabled us to assess the intensity of

competition in the cellular services industry as well as identify the various competitive

forces. In summary, the results are the following. Competition in the industry stirred by
government policy —introduction of the new PCS players and deregulation of the
telecommunications industry— has reached a very high level of intensity and keeps rising.

o The limited number of licenses poses absolute barriers to entry for firrther competition,
and for those who were allowed in, very high structural barriers remain.

o Rivalry among numerous competitors —established players and new‘PCS entrants—
can be expected to be very strong. The confirsion reigning in this crowded and fast
moving industry makes it even more volatile.

0 Although some substitutes exert a pressure on the industry, this is not a major source of
competition for the industry.

0 Ill-informed or confiised buyers do not have a real bargaining power on the industry
although some new factors such as the absence of long term contracts will increase their
price sensitivity.

0 Suppliers have an important role in the industry yet they are seen like partners more

than competitors.

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We have assessed the intensity of competition in the cellular industry and diagnosed the
forces affecting competition and their underlying causes. The cellular industry appeared as
a very competitive one, promising high profits. However, this. industry is experiencing a
tremendous growth. As a result, the forces that determine competition are bound to
change rapidly also. In fact, the competitive forces we have studied are those of an
emerging industry and will evolve as the industry matures. Besides, the communications
industry is one in which evolution is extremely fast paced which makes the time fi'ame
even shorter. This remark accounts for the fact that I decided not to develop here issues
such as wireline substitutability —or wireless local loop— which belong to a relative long
term horizon. The next section is devoted to a closer analysis of the characteristics of

emerging industries and their implications for strategy formulation.

Chapter 3

COMPETITIVE STRATEGIES IN AN EMERGING INDUSTRY

3.]. Characteristics of emerging industries

We have analyzed the structure of the cellular communications industry following Porter’s
framework. However, according to his theory, some more characteristics have to be

outlined relative to the particularities of the type of environment of the industry.

3.1.]. Definition

An emerging industry is a newly formed or re-formed industry, created by technological
innovations, emergence of new consumer needs, economic or political changes, etc. which
elevate a new product or service to the level of a potentially viable business opportunity.
However, the problems of an emerging industry can also be present when an old business
experiences a firndamental change in its competitive rules coupled with very high grth
rates caused by the changes just described.

The essential characteristic of an emerging industry from the viewpoint of strategy

formulation is that there are no or only few rules of the game.

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3. 1.2. Structural environment

3.1.2. 1. Common structural characteristics

0 Technological uncertainty. With different technologies being backed by different
competitors, no one knows which will ultimately prove best.

0 Strategic uncertainty. No right strategy has been identified and a variety of strategies are
being tried with different product/market positioning, marketing, servicing and so on,
and betting on different product configuration, technologies. Related to this is the poor
quality of information about the market.

0 High initial costs but steep cost reduction.

0 Embryonic companies and spin-offs.

o First-time buyers have to be informed and about the new product and persuaded to buy
it.

0 Short time horizon in dealing with strategic problems caused by the pressure to develop
customers.

0 Subsidy for early entrants.

3.1.2.2. Early mobility barriers
According to Porter the barriers to entry change overtime. Early barriers will not be brand
identification, economies of scale, or capital. They will not stem from the need to

command massive resources but from the ability to bear risk, be technologically creative,

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and make forward-looking decisions. As a consequence, established companies usually

come later in new industries.

 

3.1.3. Problems constraining industry development

Emerging industries face grth problems due to their newness. Although most of the
difficulties listed by Porter apply to the case of the cellular industry, most of them can be
transposed. For instance, as we will see in part B, access to raw materials can be
assimilated to the issue of cell siting. In other words, the resource sought here is space.
The difficulties that emerging industry are usually faced with are:

0 Inability to obtain raw materials and components

0 Period of rapid escalation of material prices

0 Absence of infrastructure

0 Absence of product or technological standardization

o Perceived likelihood of obsolescence

o Customer’s confusion

o Erratic product quality

0 Image and credibility with the financial community

0 Regulatory approval

0 High costs

0 Response of threatened entities.

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This last point deserves particular attention. A number of entities will feel threatened by
the emergence of the new industry and will react differently. Entities threatened by
substitution can sacrifice their profitability by lowering their costs or increasing marketing
or invest to keep up with competition. Anyhow, the higher the exit baniers, the more
aggressive the reaction of the threatened industries —in foregoing profits in pricing or in

investing in cost reduction to hold volume.

3.1.4. Early and kite markets

A very important question in emerging industries is to determine which markets will open
up first. Not only is it crucial for product development and marketing purposes but also in
terms of forecasting of the industry structural evolution. A number of criteria are crucial in
assessing the receptivity of particular markets, market segments or particular buyers to a
new product.

0 Nature of the benefit: performance or cost advantage. Usually, the earliest markets
purchasing the new product, other things being equal, are those in which the advantage
is one of performance. Cost advantage is often considered suspicious for a new product.

0 State of the art required to yield Significant benefits.

0 Cost of product failure for the buyer.

0 Introduction of switching costs

0 Support services

0 Cost of obsolescence

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o Asymmetric government, regulatory or labor barrier
0 Resources to change
0 Perception of technological change

0 Personal risk to the decision maker

3.1.5. Strategic choices

In an emerging industry where the rules of the game have not yet been established, firms
have great degrees of strategic freedom. The leverage of good strategic choices will be the
highest, yet the uncertainty of an undefined structure and changing competition make
strategic choices all the more risky. Some of the strategic issues are:

0 Shaping industry structure

0 Extemalities in industry development

0 Changing role of suppliers and channels

0 Shifting mobility barriers

0 Timing entry

0 Coping with competitors

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3.2. The cellular industry

3 .2. 1. An emerging industry

The cellular industry can be considered as an emerging industry in so far as it is a newly
re-formed industry. AS a matter of fact the introduction of PCS has caused fundamental
change in the industry competition and growth rate. The rules of the game have changed

and have to be re-established.

3 2.2. Structural environment

Most of the structural characteristics of an emerging industry can be found in the case of
the cellular industry. The early mobility barriers however, seem to be different that those

described by Porter.

3 2.2. 1. Structural characteristics

0 Technological uncertainty: no “best” technology. In the absence of a standard for
PCS air interface, several technologies have been developed. As we have seen in chapter
1, CDMA, TDMA and GSM are competing; advocates of each of them are trying to
prove that theirs will be the dominating technology. At the time when they are choosing
their technology, PCS operators do not know which one, if any, will prove to be the
“best”. This issue is critical as it affects network design, vendor selection, and will

determine firture alliances and roaming capabilities.

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0 Strategic uncertainty. A wide variety of strategies are being tried by the industry, and
no “right” strategy has been identified. For instance, in terms of market positioning, it
is not clear whether PCS will be assimilated to cellular or stand as a distinct competitor.

0 High initial costs but steep cost reduction. This has been analyzed as we looked at the
economies of scale in the entry baniers.

0 Embryonic companies and spin-offs. This emerging phase of the industry is
accompanied by the greatest proportion of newly formed companies. However, this
phenomenon is only due to the new licenses awarded for PCS and particularly the
special C-Band Entrepreneur licenses which encouraged the entry of small businesses
and minorities. Furthermore, the FCC regulation that limits cross-ownership of PCS
and licenses in the same market area was the cause of spin-offs in the industry.
Companies like Sprint Spun-off their cellular business to enter freely into the PCS
market.

0 First time buyers. Although switching to PCS is not a quantum leap for cellular users,
buyers have to be persuaded to try the new technologies but mostly to put up with the
short-comings of a nascent service —roaming for instance. They also have to convince
non cellular user that there is something new for them.

0 Short time horizon. For PCS entrants, the pressure to develop customers is so great
that they may adopt short term solutions. We will discuss that in the section devoted to
competitive strategies.

0 Subsidy. In the PCS industry, subsidy for early entrants was given by the FCC who

granted Pioneer’s Preference licenses. Not only were they awarded at a discounted

77

rate but also they enabled the licensees to develop their systems before the rest of the

industry.

3.2.2.2. Early mobility barriers

The cellular communications industry may not be a typical emerging industry as described
by Porter. As a matter of fact, as we have discussed earlier, PCS is not really a new
service. There is an important continuity between the existing cellular services and the
emerging PCS services. As a result, the barriers to entry that we have identified in the
structural analysis in section II are different from what early barriers should be according
to Porter. Furthermore, newly created companies are not the first to provide the new
service. Rather, established companies tried it first. Yet, the peculiar regulatory
environment can account for that phenomenon since no new company could afford to buy
the A&B licenses. Their entry was encouraged later with the auction of the C-Block

entrepreneurial licenses.

3.2.3. Problems constrainiryg industry development

0 Raw materials. The most difficult problem for PCS carriers is the lack of space to
install their cell site equipment. Although they are much smaller than they used to be for
cellular and do not require independent antennas, a larger number has to be installed.
This comes at a time when authorities are very concerned about environmental issues,

which worsens the Situation.

78

0 Absence of standardization. The absence of standards that we have discussed already
accentuates problems in network buildout, roaming agreements, etc.

o Customer’s confusion. Again the diversity and variety of information in the industry
and the “PCS vs. Cellular” phenomenon may limit industry sales if customers decide to
wait until they understand what’s going on before they buy.

0 Image and credibility with the financial community. We have seen the importance
of the capital requirements to install a network and start operating it. Support from the
financial community is difficult to get yet necessary to succeed. This is why most of the
A & B licensees are big companies. “Like almost all the PCS companies, Washington’s
Sprint Spectrum is backed by an awesome bankroll. The controlling shareholder, APC,
is no financial Goliath. The limited partner, however, is a gigantic creature called Sprint
Telecommunications Venture, which is a partnership of Sprint Telecommunications Inc.,
Comcast and Cox Communications. The partnership kicked in $150 million for the
Washington operation’s network equipment and operating costs ——and it is willing to
wait years for a return on investment.” Others, like many of the C-block licensees found
support from international consortia (Korean equipment manufacturers with strong
financial support for instance).

0 High costs for start up. This has been analyzed in the structural analysis.

0 Response of threatened entities.

In an article entitled “Cellular Does Digital”, Paul Rubin highlights the reaction of existing

cellular carriers to PCS competition. “PCS was cellular’s wake-up call from a marketing

as well as a technology standpoint. ‘The industry has been driven by engineering and

technology and probably rightly so,’ Elliott says. But now there is a need for market —

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and customer— focus as cellular gears up for hypercompetition, he adds. The original
hype about digital cellular centered on the ability to add capacity rather than features, and
on the technology’s internal focus. But now, Elliott says, digital is an enabler to
competition. Translation: Go digital, or go home.”

According to Porter’s model, it seems that the threatened industry —cellular— has chosen
to aggressively invest to make its service more competitive. Although Elliott says the
move to digital is motivated by marketing concerns rather than capacity, cellular carriers’
investment in the new technology will also lower their costs in the firture. In response to
the competitive pressures, cellular providers are also lowering their prices. Some cellular
carriers have chosen different options. They have added PCS to their array of service or
more radically abandoned their cellular business to jump into PCS. We will look at these

various strategies in more details in the analysis of competitive strategies.

3.2.4. Early and late markets

The most important criteria to assess the receptivity of market segments to new products

is the nature of the expected benefit. In the case of PCS, the benefit are:

0 Performance advantage: At the time being, the performance advantage of PCS is
limited. As a matter of fact, although PCS offers the advantages of digital —clear signal,
security, new features— it does not provide roaming which cellular does. And if PCS
holds great promise for future performance—including roaming—, so does cellular
which is upgrading to digital. However, the success of Sprint Spectrum in the

Washington area proves that the customers have perceived a performance advantage

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large enough to compensate for the current shortcomings. It appears that for users who
are not roaming a lot but give a great importance to the capacity issue, PCS has a very
good value. Be it for security or business purposes, a customer concerned about not
getting a signal will not worry any longer about saturation. Small PCS phones are
perceived as “more than cool”, “easy to use and sound great” according to Leonard
Wiener.

This performance advantage is coupled with a service advantage. PCS is user friendly,
offers over-the—air activation and 24h customer care.

Cost advantage: The performance and service advantages are complemented by the
lower cost of PCS. Not only is PCS generally cheaper than cellular, “so far, calling rates
for PCS minutes are running 15 to 20% cheaper than cellular in the same market”,
according to Business Week, but also the first minute of incoming calls is free and there
is no annual contract. However, PCS phones tend to be more expensive than the “low-
end one-cent or $9.99 phones frequently used to draw customers in long-term
contracts” in the cellular case. “Don’t count to see such deals for PCS phones” says
Leonard Wiener. Overall, there is a perceived cost advantage for PCS. Yet like the
performance advantage, the cost advantage is limited by the reaction of the cellular
carriers. “The established companies are beefing up technology, adding features, and
cutting prices to head off the upstarts. Most have eliminated annual service contracts for
new subscribers who buy their phones. And rates are dropping: Shortly before PrimeCo
launched its PCS network in Chicago, Ameritech Corp. cut the price per minute of its

cellular service by 15%” according to Business Week.

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According to Porter, the nature of the expected benefit is the most important determinant
of the buyer receptivity to a new product or service. Also according to him, the earliest
markets purchasing a new product, other things being equal, are usually those in which the
advantage is one of performance. In the case of PCS, there is a perceived performance,
service and cost advantage. As a result, it is diflicult to tell which first attracted the
customers. Furthermore, there was no real pressure on customers to buy the new service

to improve its own competitiveness nor specific risks in adopting it.

The lack of available data about PCS subscriber does not allow us to determine exactly
who are the early users of PCS —cellular or non-cellular users, business users or
consumers, etc. What we can tell is that they are users who place higher value on sound
quality, new features and capacity than on roaming capabilities. As cellular catches up with
PCS, the advantages of PCS over cellular will be less distinct. However, these new kinds
of services —PCS or digital cellular— seek to achieve an overall performance and cost

advantage over previous services that will open the mass consumer market.

3.2.5. Strategic choices

The introduction of PCS has fundamentally changed the competitive rules in the cellular
industry which we consider as a newly re-formed or emerging industry. Strategic choices
in this early phase will have important impacts on the performance of the firms. Some of

the strategic issues are the following:

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- Shaping the industry structure. Through their choices, new entrants in the PCS
industry will try to set the rules of the game in areas like marketing approach and pricing
strategy. However, this is limited by the fact that competition occurs on a per market
basis and the actions of a player in a specific market will not necessarily impact the
shape of competition elsewhere. Nevertheless, it seems that PCS industry is being
shaped following the orientation adopted by the early entrants. The marketing
approaches for instance seem to have common characteristics ——no long term contract,
users buy the phones, etc. Cellular is also following that path.

0 Externalities in industry development. In the absence of standards, there is a need for
firms to cooperate for the sake of the industry development. But firms may resist
standardization in order to pursue their own market position, thus creating confusion in
the market. This question of balance between industry outlook and firm outlook is
critical in the cellular industry. As a matter of fact, because they have not agreed on a
common image for PCS, let alone on standards, the grth of PCS will suffer. A good
example is the use by AT&T of Digital PCS as the name for its digital cellular service.

0 Another implication of extemalities in industry development is that firms may have to
compete initially with a strategy it ultimately does not want to follow. These temporary
actions may be necessary to develop the industry but can be dropped later to achieve a
better position.

0 Changing role of suppliers and channels, shifting mobility barriers. As we have seen
already, firms must anticipate the evolution of structural conditions as the industry

grows.

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0 Timing entry. This is a critical choice for competing in emerging industries. On the one
hand being an early entrant in the PCS industry creates advantages in terms of customer
development, image, learning process, etc. On the other hand, early entrants will face
greater risk and uncertainty. For instance technological choices will be more risky for
early entrants than for followers. Furthermore, early entrants will have to cope with the
shortcomings of systems that are not yet fully developed.

0 Coping with competitors. It is critical for pioneers to balance their efforts devoted to
fight competition with those devoted to building their own strengths. It may even be
appropriate to encourage certain competitors which may help in technological

development for instance.

Conclusion

This section, which was aimed at highlighting the particularities of cellular as an emerging
industry, comes to an important conclusion. The cellular industry is very dynamic, and the
position of PCS in it is not yet well defined. The relations between PCS and cellular will
evolve over time.

In this emerging industry, competition will be intense. However, “overall, the growth of
wireless acceptance to date portends a lucrative market for a large fleet of competitors. A

lot of people will win,” says Meyers in “Navigating Wireless Waters”.

Chapter 4

COMPETITIVE STRATEGIES

4.1. Generic competitive strategies

4.1.1. Three generic competitive strategie_s

Competitive strategy consists in taking offensive or defensive actions to:

0 create a defendable position in an industry,

0 cope successfiilly with the five competitive forces, and thereby

0 yield a superior return on investment for the firm.

Porter identifies three potential successfiil generic strategic approaches to outperforming

other firms in an industry: overall cost leadership, differentiation and focus.

STRATEGIC ADVANTAGE

Uniqueness perceived Low cost position
by the customer

 

OVERALL
Industrywide DIFFERENTIATION COST LEADERSHIP

STRATEGIC
TARGET

 

Particular I
segment only FOCUS

 

 

 

Figure 5 - Generic Competitive Strategies

Source: Porter, M.

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4.1.1.1. Overall cost leadership

This strategy consists in being the low-cost producer in the industry. The company’s
target is usually broad, which is often important in its cost advantage. The sources of cost
advantage are varied and depend on the industry structure. A cost leader however, must
achieve parity or proximity on the basis of differentiation relative to its competitors to be
an above-average performer.

The strategic logic of cost leadership requires that a firm be the cost leader, not one of
several firms vying for this position. When there is more than one aspiring cost leader,
rivalry among them is fierce and the consequences for the long-term profitability of the

industry can be disastrous.

4.1.1.2. Dif’ferentiartion

This strategy consists in seeking to be unique in the industry along some dimensions that
are widely valued by buyers. The firm is rewarded for its uniqueness with a premium price.
The differentiation can be based on different attributes which vary depending on the
industry —the product itself, marketing approach, service, etc. A successful differentiation
strategy requires that the price premium be greater than the cost of differentiation. As a
result, in order to achieve above average performance, a differentiator will aim at cost
parity or proximity relative to its competitors.

Unlike cost leadership, differentiation strategies can be adopted by more than one
competitor in the industry. However, in order to be successfiil, they will have to be based

on different attributes.

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4.1.1.3. by

This strategy consists in choosing a narrow competitive scope —a particular buyer group,
segment of the product line, or geographic market —within the industry. The idea is that
by tailoring its strategy to serve the targeted segment very well, the company will be able
to serve its narrow strategic target better or more efficiently than competitors who are
competing more broadly. This strategy has two variants. The cost focus in which the
company seeks a cost advantage in its segment is based on differences of cost behavior in
some segments. Differentiation focus, whereby a company seeks differentiation in its
target segment, exploits the special needs of buyers in some segment.

Focus strategy will not succeed unless the target segment is different from other segments
in the industry. Furthermore, the segment has to be structurally attractive for the focuser
to be an above average performer in its industry.

Focus strategies can be adopted by more than one competitor in the industry provided that

they choose different target segments.

4.1.2. Risks of the generic strategies

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Table 17 - Risk of generic strategies

 

 

 

Risk of cost leadership Risks of differentiation Risks of focus

Cost leadership is not sustained Differentiation is not sustained The focus strategy is imitated
- competitors imitate - competitors

0 technology changes 0 bases for differentiation become The target segment becomes
0 other bases for cost leadership less important to buyers structurally unattractive

erode

Proximity in differentiation is lost

Cost focusers achieve even lower
cost in segments

 

Cost proximity is lost

Differentiation focusers achieve
even greater differentiation in
segments

 

0 structure erodes
o demand disappears

Broadly-targeted competitors
overwhelm the segment

a the segment’s differences from
other segments narrow

o the advantages of a broad line
increase

New focusers sub-segment the
industry

 

Source: Porter, M.

4.2. Entry straflgies for PCS providers

4.2. 1. Early trends vs. long term strategies

In an advertisement published in Telephony, Lucent Technology makes the following

statement: “Despite the projected success, wireless is still a brutal battleground with many

different competitors vying for customers and facility space. The pressure is on for PCS

providers to make great strides in a very short time. They’ll be doing so at both the

expense of and thanks to inroads made by their cellular counterparts.”

 

88

This reminds us of the fierce competition that we have diagnosed in the cellular industry
with the emergence of PCS. But more importantly, this advertisement stresses the
importance of the time dimension. The short-term horizon is often an issue for strategy
formulation in emerging industries. In the cellular industry, competitors vying to play in
the emerging PCS services segment are formulating entry strategies which will evolve as
the industry matures. The competitors for the existing cellular services are developing
strategies to cope with the new competition. In the long-term, the perspective will be very

different. It is too early to tell what competition will look like in the future.

As we look at the different competitive strategies, we will see that some trends such as
competition price are not predicted to last, although they will be dominant in the early

phase of the industry.

4.2.2. PCS vs. Cellular

 

At the time being, PCS is a new service entering the cellular industry. We have seen in our
definition of the cellular industry that it becomes the closest substitute to the existing
cellular services. We have also seen the differences that exist between PCS and cellular.
Based on these differences, PCS and cellular will compete. Some industry participants and
observers contend that PCS and cellular will become so much alike in the future that the
distinction will no longer exist. Some even say that this has happened already although this
is true only from a customer’s perspective. For now, the constraints underlying economics

and resources of PCS and cellular systems are different.

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In every market, PCS licenses will develop entry strategies, cellular will develop defensive
strategies, and those who have both will have mitigated strategies. Based on the industry
analysis we have performed, I will look at the various entry strategies that may be
developed and assess their strength and weaknesses to provide a defensible position in the
industry. This analysis will not be based on the characteristics of the various players but
rather on structural characteristics of the industry and market analysis. Analysis of

particular competitors will be led in the next section.

Not a zero-sum game

“Fortunately for all participants, this is not a zero sum game. AIS forecast models indicate
that robust grth in the overall wireless business will let cellular operators expand their
subscriber rolls in current markets even as new entrants use PCS spectrum to gain a
foothold,” says Hall in an article entitled “Cellular carriers are positioned for success in ear

ofPCS.”

4.2.3. Market Segmentation

“The company that can really figure out the right market segmentation and the ability to
address these segments in the right way will really do well” says Alex Mandl, president
and CEO of AT&T Wireless in an article entitled “Gathering of eagles’ advises carriers to
focus on customers”. Knowing and understanding the market is indeed a critical step for
strategy formulation. Before they can decide on whether to adopt a cost, differentiation or

focus strategy, the competitors need to know their potential customers and decide on the

90

best ones for them to target. A number of characteristics can be used in customer profiling

such as product/service orientation, demographics, geography, usage patterns, value, etc.

Findings like those of the Yankee Group’s 1996 Mobile user survey give very valuable
information such as usage and price sensitivity (cf. Table 5). In a study entitled “Wireless
Voice of the Customers: Improving Wireless Customer Satisfaction and loyalty”, Coopers

& Lybrand Consulting also provides very useful data.

 

 

     

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The study reveals some general perception about the nature of customers. They identify

five need-based customer types:

0 “Value seekers”: low monthly bill, usage based on specific needs and spending limits,
extreme price sensitivity, limited usage experience and personal calling.

0 “Productivity users”: mostly business users with the heaviest calling patterns and
extreme sensitivity to price, rated the most likely to switch providers and demand high
quality network service.

0 “Safety and simplicity”: use wireless for emergencies, the least likely to call customer
service, do not like the complications and restrictions of their calling plans, poorly
informed of their service choices.

0 “Cell phone as a perk”: users who have bill paid by an employer or a third party, mostly
moderate users but also a few heavy users, the least concerned with price but interested
in improved network and customer service.

0 “Bargain hunters”: want flexibility in pricing plans, extremely price sensitive, extremely

likely to switch providers, the most informed about their service choices.

The identification of specific trends may give carriers some clues as how to formulate
new service strategies. However, although knowing the wireless users and particularly
their tendency to switch is important for new PCS entrants, it is equally important to know
the non wireless users. As a matter of fact, the mass market is considered as a very
important grth opportunity and while PCS may seek to attract some cellular users, they
will most importantly try to develop new customers. This is all the more true as many PCS

players are playing on both sides.

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4.2.4. Potential_and limits of cost. differentiation and focus strategies

4.2.4.1. Cost leadership strategy

First of all, we have seen that there can be no more than one cost leader per market,
otherwise a price war would start and market profitability would collapse. Several reasons
lead me to think that overall cost leadership strategies are not likely to be pursued by PCS
licensees to enter the cellular industry. This does not mean that competitors will not
compete on price. According to Dan O’Shea, “early indications are that many PCS
operators will try to compete heavily on price”. However, this is only a short-tenn
strategy and does not necessarily reflect the nature of the long term strategy adopted by

the competitors.

0 Structural reasons

Several factors outlined in the structural analysis make price competition look unlikely.
First, although competition is intense, the growth rate in the industry is very high. As a
result, even if a competitor develops lower prices, the competition will not necessarily
have to follow. Second, entry barriers are high but exit barriers are low. Competitors
having difficulties are not likely then to stay in the industry and price their services below
the competitive level in order to limit their loss. Thirdly, the competitors are very diverse
and as a result have different cost structures which limit the risk of price war. Since their

can be only one cost leader per market, adopting such a strategy is risky. And given the

94

industry context, there is no real pressure to do so because many other opportunities exist.

Nevertheless, many niche cost strategies are possible.

0 Importance of price

- Although the study by Coopers & Lybrand shows price as very important, it also
predicts that price will be less significant in the years to come according to O’Shea in
“Looking for little satisfaction”. “We are estimating that it will drop out of the equation
over the next five years” says Patberg. Other elements of wireless service are expected to
emerge as the significance of price wanes. “Brand image, customer service and network
quality, especially in terms of coverage and reliability will pick up the slack”.

- The first three regional PCS networks in operation —Sprint Spectrum in Washington
DC, and Western Wireless’ VoiceStream in Hawaii and Salt Lake City— all offer
consistently lower prices than existing cellular carriers in these markets. According to
President Philip Alford of Tekelec PCS will be launched as a lower-cost alternative to
cellular, but will quickly evolve into something more significant, says Lannon in
“Rings of Change”. Cellular operators are pushing their investment in digital technology
to meet the strategic challenge of PCS. As a matter of fact, the improvements brought by
digital technology have drastically reduced the cost of PCS networks, and the same will
happen to cellular. Increased competition will also lead to decrease in the prices of
wireless, but this does not mean there will be a price war.

- New lower prices will not start a price war. An article entitled “Price as a PCS edge”

studies the question of how much will price matter in the Cellular Vs. PCS competition.

95

 

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“The Yankee group predicts that the new carrier’s (Voice Stream) plan will not start a
price war but will serve to stimulate overall wireless subscribership and usage minutes in
the Salt Lake city area.” This statement reflects two underlying ideas in the industry. First,
new lower prices are nor aimed at merely stealing customers from cellular, but at
developing customers in the mass market. Second, a very important idea in the wireless
industry is that what is important is to increase air time. “For the first time in the
wireless industry, it is no longer the quantity of customers that counts as much as
the quality of customers.” The profile of the potential new user is diversifying and
average monthly revenues are decreasing according to Donaldson, Lufldn and Jenrette.

“While cost may be the initial attraction of PCS, the marriage of lower cost and higher
voice quality seeks to reverse current calling trends. For wireless to succeed, usage has to
go up.” says Bob Sellinger, Lucent Technologies’ director of personal communications
systems. Furthermore, according to Coopers & Lybrand’s market segmentation, the most

price-sensitive customers are not necessarily the customers of the best value.

96

- Finally, a trend toward bundling of services may make prices of services less important

separately.

0 Competitive advantage

- “A company which pursues this (cost) strategy must be committed to both radical and
continuous improvement across all of its business processes... All areas of operating costs
must be evaluated and minimized, but particular attention must be given to the cost of
acquiring customers” says Carl Aron. The question then is whether PCS entrants are
better positioned to develop a competitive advantage on cost. I will discuss this issue in
more details in the competitor analysis in the next section. However, what we can say is
that PCS operators do not necessarily have a cost advantage although they benefit from
the lower costs of the new technology. As a matter of fact, cellular operators have
advantages due to their incumbency. Their networks are already in place and they have a
subscriber base. Yet they have to face a costly transition from analog to digital to stay
competitive.

- Most competitors have no interest in competing on prices and thereby risking to start a
price war. According to a BRG study, although PCS operators are under great pressure to
get customers, “Carriers, however, are reluctant to compete too strenuously on price
while trying to recoup on their investments.” Furthermore, “if new entrants pursue a pure
low-price market entry strategy, they could, in certain markets, find those prices being met
by incumbent wireless providers reluctant to yield market share”. On the one hand cellular
customers have recovered much of their capital investment and enjoy a strong cash flow

that will pennit them to respond to price competition. Yet on the other hand, they have a

97

pricing dilemma. “If digital service is priced aggressively to compete with PCS, prices may
also have to be lowered for the current analog” says Hall. Another factor playing against
price competition is the fact that many competitors are fighting on both sides. To put it in
a nutshell, neither PCS nor cellular carriers have an interest in starting a price war, and we

will see in the next paragraph that they have many other means to compete.

“Market segmentation plays a key role in the growth of the business. You have to know
your customers —what they want and what they are willing to pay. Some new companies
are probably going to underprice, and they may take a bath. People want good value for
what they’re getting,” says Sprint Spectrum’s Battey in “Navigating wireless waters”. “It’s

not necessarily a cheap price”.

4.2.4.2. Differentiation strategy

“If competition spurred the price decreases and drove the long-distance industry to
become similar to a commodities market, then it was also competition that spurred the use
of the long-distance network for things other than basic telephone service—other services
and features that began to differentiate one company from the next.” says Felix in an
article about enhanced services. The same thing is happening in the cellular industry. As
matter of fact, before the introduction of PCS in cellular markets, the duopoly situation
kept prices above the competition level and carriers did not need strong differentiation.

Although there are many cellular carriers in the US, competition happened on a per market

98

basis and there were only two competitors per market. Now, with as many as 8 potential

competitors in each market, prices have decreased and differentiation becomes a key issue.

Other factors make differentiation strategies very attractive. As we have seen in the
structural analysis of the cellular industry, differentiation is critical in a crowded or
confusing market. This is the case in the cellular market. We have noted already many
reasons that make the cellular industry so confusing —-introduction of PCS, deregulation,
emerging industry, etc. This confusion is also due to the lack of information of customers,
their difficulty to understand the new and vague concept of PCS. Moreover, as Sprint
Spectrum’s Battey puts it: “the incumbent cellular carriers will do their best to confuse the
customer as to what PCS is.” And this is blatant when we see AT&T digital cellular
service named “Digital PCS”. As a result, PCS entrants will try to educate their customers
and differentiate their PCS services, yet for those who fight on both sides like AT&T, this
will not be the case.

A second reason to adopt a differentiation strategy is the mass market approach that many
PCS companies have chosen. “Lower prices brought by increased competition will let
wireless voice companies target the mass consumer market. In this arena, effective
brand management and mass media advertising will be critical to succeed.”
Furthermore, “Branding is crucial in a crowded field where providers are clamoring for
business from the non-techno-savvy masses”, says Krapf in an analysis of the California
market of the future. “The shift to mass marketing approach seems to be gaining

momentum” says Blake in an article entitled “Identifying Your Customers”.

99

A BRG study ——PCS: The Carrier Perspective— based largely on interviews with carriers
in the fields of cellular, broadband PCS, satellite and narrowband PCS examined
competitive strategies in wireless. It claims that carriers will try to differentiate their
services from their competitors primarily by keeping their services easy to use and
through branding. Fred Blanck, who is in the business of solving and helping avert
marketing problems encourages its clients to take a proactive approach by differentiating

themselves in the widely competitive industry.

Brand management is the art of communicating the unique qualities of a company and its
products carefiilly and consistently over a long period of time. Furthermore, brand
recognition is about attracting customers and brand loyalty is about retaining them. For
service providers, there are a number of areas for differentiating themselves: quality,
customer service, feature/function, etc. PCS clearly has a large basis for differentiation. As
a matter of fact it offers many characteristics that were not available before, although
cellular is catching up. Enhanced quality, security, portability, and numerous features
provide a basis for a differentiation on quality. The new concept of customer care is also

very important.

Although I am not going to look at all providers, let’s take the example of PrimeCO
developed by Meyers in “Past, Present and Future, PrimeCO focuses on melding the real
world experience of its partners with its new vision of wireless”. “We will differentiate

ourselves based on quality ——the total quality experience that our customers will have,”

100

says Karen Little, vice president of marketing at PrimeCo. “We believe there will be a
distinct difference in the quality of our network.” The market being more segmented, there
is room for many differentiation strategy in every market. Although we can observe a
variety of messages, a few are recurring. Easy-to-use is one of them, and total customer
care is another. Competition takes place on a per market basis, yet some competitors will
seek national presence and higher profile names. This is the case for PrimeCo who seeks
national presence through its partnership with Bell Atlantic, Nynex, Airtouch and US.

West.

4.2.4.3. Focus strategy

Although overall cost leadership did not appear like an attractive or sustainable strategy to
enter the cellular market while differentiation seemed much more attractive, both of these
strategies are being developed on a narrower basis. There are several dimensions to
narrow the scope of these strategies. First, there is the geographic one. Although
competition happens on a per market basis, having a national leadership image can be a
competitive advantage. It is not necessary though, and if one is not a Sprint or an AT&T,
an RBOC bringing PCS in its home market can achieve a very strong differentiation
advantage and lead a successful differentiation strategy in its regional market. The second
dimension along which the carriers can narrow their competitive strategy is the market
segmentation. As a matter of fact, although industry-wide cost strategy is unlikely, many
focus cost strategy are being developed, targeting niches of the market. One of them is the

low-tier approach which targets the low-mobility users. Another dimension for

101

differentiation is the breadth of the company image. For instance while some players like
AT&T will position themselves as multiservice providers, others will differentiate them by

focusing solely on wireless to be unique and stand apart as “pure-play” wireless.

Many factors favor the adoption of focus strategies. The first one is the geographic
segmentation of the cellular industry. The number of markets ——51 MTAs and 492
BTAs— give many opportunities for PCS entrants to tailor their geographic market to the
type of strategy they want to adopt. While some will seek national coverage, others will
focus on a particular region. Second, there are a variety of technologies for PCS which
give the service providers very different cost structures. As a result, one service provider
will be able to deliver one particular service at a lower cost. A third factor is the variety of
licenses. While the A&B licenses are reserved to big players because of the price of the
licenses, many smaller providers who benefited fi'om the C-Block Entrepreneurial licenses
are planning to fill in wireless niches by providing low-tier service that offers PCS

fiinctionality without extended mobility.

Lucent Technologies highlights some limits of niche strategies. “Survival may prove quite
difficult for the small niche player that plans to go it alone and doesn’t align in some
fashion with other carriers. Alliances are key because they greatly broaden the scope
through roaming and give providers access to high-end products that will be advertised
around the country.” Yet this problem will be offset if niche players manage to achieve a

significant advantage in their targeted scope.

102

Because the market is very segmented there are many niche strategies. F lat-fee services,
mall-based services and cordless extensions at home are some examples. Segmenting the
market place and devising niche services for these segments will attract customers. “An
example could be phones for kids says Osmo Hautanen, vice president and general
manager-PCS for Nokia Telecommunications in “Wireless showdown” by Dziatkiewicz.

“You’re looking at a completely different segment with existing technology”.

An example of cost and differentiation focus is US. Airwaves Inc., a startup founded by
former US. West Inc. executive John DeFoe. With an aggressive goal to build a
nationwide network, it was the largest depositor in the entrepreneur’s block. Although it
has a view to build a national network by owning properties and creating an alliance where
other companies can join in, it is still a small company. In an interview with Investor’s
Daily, DeFoe says he wishes to compete with AT&T Wireless, PCS P’rimeCo and Sprint.
The question then is “can a small fry play the PCS game with PCS giants?” “We can do it
by getting to a much lower operating cost, offering better economic value... If we have a
national scope and alliance partners, that will give us scale and scope, allowing us to buy
equipment at the same level the bigger player can.” Yet U.S. Airwave does not seek
industrywide cost leadership. Its target is a mass market: small businesses, families and
teen-agers. “We will build a simple talk-and listen product and unlock the market for
people who make calls to express feelings. The cellular companies depend on business
calls; ours is based on emotional content, where you can immediately express feelings

about events that just occurred. We will provide a phone service at a very economical

103

level. That will allow people to makes lots of inexpensive calls. To customers, it will look

and feel like a cellular phone, but our phones won’t have as many sophisticated features.”

Conclusion

What derives from this analysis is that in terms of competitive strategies, the introduction
of PCS was a watershed in the cellular industry. Competitive advantages that had no
reason for being sought before are becoming critical. Branding is one example. “Cellular
carriers aren’t very distinct. You can’t look at any of them and see brand names. There
aren’t any,” says EDS’ s Goodstat in “Wireless showdown”. And “no existing carrier has
sufficient brand clout to carry it into expanded wireless markets.” Although differentiation
strategy is more likely than cost leadership, what we will mostly see is a combination of
them and focus strategies. As a matter of fact, we have to keep in mind that cost
leadership still implies a good level of differentiation as well as differentiation requires cost
proximity with the competitors. Finally, given the number and the diversity of the
competitors, what we will see is a myriad of different strategies based on the competitive
advantages that are specific to each player. The next section is a competitor-based analysis
of the various competitive strategies.

To put it in a nutshell, what we are seeing here is the emergence of new competitive
strategies in response to a major shift in the industry. As the cellular industry is opening to
the mass market and becoming a commodities industry, the bottom line has become

customer focus.

Chapter 5

COMPETITOR ANALYSIS

5.1. Theory and scope of the competitor analysis
5.1.1. Porter’s framework for competitor analysis

Michael Porter’s competitive analysis is aimed at “developing a profile of the nature and
success of the likely strategy changes each competitor might make, each competitor’s
probable response to the range of feasible strategic moves other firms could initiate, and
each competitor’s probable reaction to the array of industry changes and broader
environmental shifts that might occur.” There are four diagnostic components in Porter’s

framework: future goals, current strategy, assumptions, and capabilities.
5.1.2. Scope of the analysis for the purpose of our research

According to Porter, perceptive competitor analysis is a central aspect of strategy
formulation. My goal here is not to formulate a competitive strategy. Rather, I have the

role of an industry observer whose goal is to examine competitive strategies in the cellular

104

105

industry. More particularly, my analysis is aimed at determining the nature of the entry
strategies of PCS operators in the wireless market. Since only a few of them have
commercialized their services, and only very recently, this analysis is mostly a “potential

competitor” analysis.

Although following Porter’s framework and systematically looking at all the competitors
would yield very interesting results, this goes beyond the scope of my study. As a matter
of fact, as I highlighted in the paragraph about the rivalry among competitors) there is a
score of competitors, with very diverse backgrounds and complex interrelationships.
Furthermore, since this is an emerging industry, there is very little data available for the
analysis. On top of that, strategy being a confidential issue, any information likely to give
clues about strategy is kept secret. As a result, I am going to do a limited analysis which

will lead me to limited assumptions concerning the strategic choices of PCS competitors.

5.1.3. Method

The number and variety of competitors make it impossible to compare their relative
strengths and weaknesses. However, we can compare strategic groups provided that we
find a meaningful way to create such groups. Among other things, one characteristic of the
nature of the competitors will have a significant influence on their strategy formulation. It
is the fact that they are or are not a cellular player as well as a PCS competitor.
Throughout this study, we have opposed PCS entrants to existing cellular carriers. We

have also noted the consequences of having competitors playing on both sides.

106

I have studied in the previous section the likelihood of each of the generic competitive
strategies to be adopted as entry strategies in the cellular market. However, I am unable in
the context of that study to make such predictions based on individual competitors.
Instead, based on a simple criteria that allows me to group the competitors, 1 will look at
how they will position their services and assess their relative strengths and weaknesses.

Two examples will illustrate this analysis: Sprint and AT&T.

5.2. PCS Competitor analysis

5.2.1. A variety of competitors

First of all, we have to keep in mind that although some competitors are seeking to
provide national coverage through alliances, competition takes place on a per market
basis. In each market, we there are up to six PCS and two cellular carriers. Only three of
the six licenses have been awarded in each market so far. With 18 licenses in the A&B

blocks and about 100 in the C block, there is a great diversity among competitors.

The PCS competitors differ in several ways which will have an impact on their strategy

formulation. Some factors are:

0 type of license: A&B licensees are very different from C licensees. First, because the C
block was reserved to designated entities, C licensees respond to specific economic

criteria. Second, A&B licenses are based on larger territories. The price per pop in the C

107

block was much higher on average. These differences will lead the competitors to adopt
different competitive strategies.

0 nature/origin of the company: PCS licensees are LECs, IXCs (RBOCS and
independent companies), independent cellular companies, cable companies, and alliances
of different kinds of companies. According to their nature, the competitors will have
different competitive advantages which explain their different strategies.

0 size: PCS competitors range from giants to very small players.

0 corporate strategy: PCS strategy is included in different overall corporate strategy. For
instance, PCS can be an end in itself, or just a mean (like bypassing the local loop) to
achieve a broader strategy.

0 cellular carrier: Some PCS competitors have cellular operations while others are pure
PCS. Although the FCC regulation prevents carriers from owning PCS and cellular
licenses in the same market, the fact that competitors are cellular somewhere and PCS

somewhere else will have important consequences. We will see that in the next

paragraph.

The following graph compares some of the major players in the PCS industry. Although I
have taken a reduced sample by choosing only big players, we can observe an important

diversity. This reflects the diversity of the whole range of PCS players.

108

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109

Sprint Telecommunications spun-off its cellular business to be able to jump freely into
PCS. It is present in 33 of the 52 MTAs yet it misses two important markets, Chicago and
Atlanta, for which it will have to find partners. This national coverage strategy is part of
an overall strategy that consists of offering integrated wireline, wireless, and cable services
on a national basis.

After the acquisition of McCaw, AT&T positioned itself in the markets where McCaw did
not have licenses, pursuing a strategy of filling the holes in its coverage.

PCS PrimeCo’s strategy should be similar to AT&T’s because of PrimeCo’s important
cellular presence. However, PrimeCO played on a smaller scale, buying only 1] licenses.
Like Sprint PCS, PrimeCo is a consortium, yet these players are of a different nature.
Pacific Bell pursued a regional strategy in California: Los Angeles and San Francisco.

GTE’s four licenses broaden the presence it already maintained in cellular.

In the C block, Nextwave has adopted a niche strategy that consists of building a network
and selling volumes to resellers or long distance carriers. Its system may become the third
largest after Sprint’s and AT&T’s. Like Nextwave, DCR is an entrepreneur that is
supported by Asian consortia. Omnipoint, which has 18 C licenses, already had a pioneer’s

preference license in New York.

5.2.2. Competitors strerpgths and weaknesses for each strategy

Let’s divide the new competitors in the cellular industry in two groups: those who have

PCS licenses only and those who have PCS and cellular licenses. This will enable us to

110

examine how each group tends to position their services, and to look at the competitors
relative strengths and weaknesses. Since only a few services have been launched these are

mostly assumptions about what is likely to happen.

5.2.2.1. PC S-only providers: true new wireless mm

Although they may not be new to telecommunications, not even to wireless, I call the
“truly newcomers” those that don’t have cellular licenses because they are entering a
market in which they have no other presence. While incumbents may have advantages over
them, the PCS entrants will benefit fi'om their position in several ways.

First, thanks to their spectrum and technology advantage, they will be able to achieve fast
and cost effective network buildout and provide differentiated enhanced services. As we
have seen in the section 1, PCS provides many features that cellular cannot. Second, PCS
entrants will find it easier to position themselves in the market. Unlike competitors fighting
on both sides they can differentiate themselves as offering a new service that is better than
cellular. They have a brand new network but most importantly a fresh look, and a new
customer-focused approach. Thirdly, they were not restricted in their license acquisitions
by the regulation concerning cross-ownership.

On the other hand, they have to face important startup costs. They do not have
infrastructure in place, nor distribution channels. They may also lack experience. Yet, this
is not necessarily a burden, as they may have other resources. Another major drawback is

the fact that roaming is not yet available for PCS.

111

An example of the “truly new entrant” is Sprint Spectrum. Having spun-off its cellular
operations, it is free to jump in the PCS market. Furthermore, in the case of Sprint

Spectrum, it has a lot of resources to facilitate its entry.

Positioning in the case of all-PCS companies will clearly present PCS as a new and distinct

service.

5.2.2.2. PCS & Cellular providers: the “so-called” newcomers

PCS licenses who have cellular licenses in other markets have some advantages. They
have experience, they have a customer database which is a very valuable resource in an era
of customer focus. Their subscriber base gives them a cash-flow and some security. They
can also benefit from their cellular presence to gain a national coverage.

However, because they fight on both sides, they will have problems to have a consistent
image. Furthermore, their expansion is limited by the FCC regulation. They also face the

difficulties of migration to digital in their cellular networks.

Providers who have both cellular and PCS will not position themselves in the PCS market
as having a new, revolutionary offer. As a matter of fact, they don’t want to compete
against themselves. As AT&T did, they might instead try to confiise the customer as to

what PCS is.

112

5.3. The examples of Sprint PCS and AT&T Wireless

5.3.]. Sprint PCS

5.3.1.1. Company profile

Founded in 1994, the company became Sprint Spectrum LP. in February 1996. It then
changed its name again to Sprint PCS. It is a venture of Sprint Corp, Tele-
Communications Inc. (TCI), Cox Communications and Comcast Corporation. The
partners invested $2.1 billion to acquire PCS licenses in 32 combined MTAs. Sprint PCS’s
goal is to offer PCS to 182.4 million people in the US (70% of the entire population). In
order to comply with the requirements of the FCC regarding overlaps between Sprint’s
cellular and PCS markets, it spun-off its cellular operations which became 360 deg.
Communications. Sprint Spectrum was the first to offer PCS in the US. The service was
first made available in Washington/Baltimore, through APC, an affiliate of Sprint
Spectrum L.P. Sprint Spectrum will be offering these services in major markets beginning
in late 1996. The objective is to substantially complete the remainder of its system by

December 1998.

The four companies remain committed to the original vision of a single, integrated
offering of wireless service, alternative local telephone service, and a long distance

package with cable television service.

113

Sprint PCS owns a total of 33 licenses including 2 pioneer’s preference. The 16 major

markets are (highlighted are the Pioneer’s preferences):

Table 19 - Sprint PCS’s major markets.

 

MTA

POPs in millions

 

 

New Yo

 

 

San Francisco

 

 

 

Detroit 10.0
Dallas 9.69
Boston 9.45

 

 

 

 

 

eapolis

 

 

 

 

 

 

 

 

 

 

 

 

Miami 5. 13
New Orleans 4.92
Saint Louis 4.66
Milwaukee 5.4 1
Pittsburgh 4. 10
Denver 3 .88
Seattle 3.82
Source: FCC.

5.3.1.2. The product

Sprint PCS’s product now available in the new Washington/Baltimore area is presented as

“The All-in-one Personal Communications Service.” The service combines a personal

phone, answering machine and pager all in one device that fits in the palm of your hand

and offers these features:

caller ID
voice mail

100% digital state-of-the-art network
answering machine and pager
exceptional voice quality and clarity
call privacy and security

0 text messaging

0 call waiting

0 call forwarding

0 call barring

0 information service
0 fiee 911 access

114

Other characteristics of the new service are:

0 No long term service contracts required
0 Hassle-free activation and service
0 Personalized features and services
0 Technology made simple.

5.3.1.3. PCS offer in Washington/Baltimore

Table 20 - PCS offer in Washington/Baltimore: Basic services.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

free airtime monthly package activation fees extra minutes
included price
Cellular One 30 minutes $29 $35 39¢ peak
off-peak l-yr contract 19¢ off-peak
minimum
BANM - $28.95 $30 39¢ peak
l-yr contract 19¢ off-peak
minimum
Sprint PCS 30 minutes $25 - 31¢ peak
anytime no contract 10¢ off-peak
Features Cellular One BANM Sprint Spectrum
answering machine $5.95 $5.95 free
numeric paging no $10 free
caller ID no no free
Call waiting $3.00 $3.00 $2.00
handset rgflacement $2.95 no $4.00
call barring $1.50 no $5.00
call forwarding included in call included in call $2.00
waiting waiting
conference call included in call included in call no
waiting waiting
detailed billing $3.00 free free
auto assistance $2.00 no no
Total price $16.90 $18.95 $13.00

 

 

 

 

 

Source: Martin, P-Y.

* This comparative analysis is based on the services Peace of Mind from Cellular One,
Flex Plus from BANM, and Talk 30 from Sprint PCS. Sprint PCS also proposes Talk 15
(15 minutes included), and BANM offers two other basic services (Flex Plan and Talk
Along ) with lower activation fees. They were not used in the analysis because they offer
limited coverage. Similarly, Talk 30 was chosen instead of Talk 15 in order to have a more
homogenous basis for comparison.

115

Table 21 - PCS offer in Washington/Baltimore: High-end services.

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

free airtime monthly package activation fees extra minutes
included price
Cellular One 1200 minutes $169 $35 9¢ peak
600 peak l-yr contract 10¢ off-peak
600 off-peak minimum
$159 (2-yr)
BANM 800 minutes $28.95 $30 25¢ peak
400 peak 1-yr contract 10¢ off-peak
200 off-peak minimum
Sprint PCS 1200 minutes $150 - 25¢ peak
600 peak no contract 10¢ off-peak
600 off-peak
Features Cellular One BANM Sprint Spectrum
answering machine $5.95 free free
numeric paging no $10 free
caller II) no no free
Call waiting $3 .00 free free
handset replacement $2.95 no free
call barring $1.50 no $5 .00
call forwarding included in call free $2.00
waiting
conference call included in call free no
waiting
detailed billing $3 .00 free free
auto assistance $2.00 no no
Total price $16.90 $10.00 $7.00

 

 

 

 

 

 

Source: Martin, P-Y.

* This comparative analysis is based on the following services: SuperSaver from Cellular
One, Ultime Access Plus from BANM, and Talk 1200 from Sprint.

5.3.1.4. Strategy

Wireless ’96 brought news that APC’s Sprint Spectrum had garnered 60,000 customers
since its launch in November. “We have created the fastest growing wireless system in the

world,” said Scott Schelle, CEO of APC in “Cellular renovation” by Meyers. What kind of

entry strategy caused that success?

116

Sprint Spectrum presents itself as a cheaper alternative to cellular. And according to the
comparison of prices in the Washington/Baltimore area, this claim seems to be legitimate.
However, price does not play a major role in the strategy of Sprint PCS nor does it
account totally for its success. And the fact cellular subscribers have also grown

significantly although prices remained stable shows the secondary role of price.

The key of Sprint PCS’s strategy is “customer focus”. As we have seen as we looked at
the various generic competitive strategies, the decrease in prices in the cellular industry
caused by the introduction of PCS and more competition has opened the door to the mass
market for cellular services. And although there still remains a business segment, there is a
whole new segment to penetrate. And it is this new mass market approach that has created
a need for customer focus. In other words, providing customers with good value is not
enough. Competitors must take extra care of their customers to retain them. To that
purpose it is critical to segment the market and respond to the demand of the various
customer segments. “We oversimplify too often,” said Ronald LeMay, president and CEO
of Sprint. “There are a myriad of value propositions for different customer segments.”

Reports Meyers in “Cellular Renovation”.

To meet the new demands of an industry in which the customer has to be the center of its
concerns, Sprint PCS has adopted a differentiation strategy that is developed along several

lines.

117

First, Sprint PCS proposes a differentiated offer: “Sprint Spectrum’s unique features”

0 All-in-one communications

100% digital technology

over the air activation

“home phone” like service

24—hour customer care

and also:

0 no contract

0 free minute for incoming calls

0 great rates on Sprint Long Distance

0 choose your number, your billing cycle

Second, Sprint Spectrum develops a new marketing approach. Sprint is creating “new
advertising methods, distribution channels and promotional techniques, all in the name of
penetrating a new market segment for a traditionally business-oriented service,” says
Meyers in “A Spectrum of Experience”. A good example of these new methods is the
alliance created between Sprint and RadioShack. “This alliance will result in an
unprecedented nationwide distribution of communications products and services through a
retail channel,” said Wiliam T. Esrey, chairman and CEO of Sprint. “Sprint, Sprint
Spectrum and RadioShack will offer to consumers a complete package of customized

consumer products, simply and conveniently in a familiar store in their neighborhood.”

118

This alliance reflects two other important elements of Sprint’s strategy that go hand in
hand: branding and nationwide service. “The nationwide reach of RadioShack is a
perfect complement for our national PCS service,” said Andrew Sukawaty, CEO of Sprint
Spectrum. Sprint-branded PCS products will be distributed in 300 RadioShack stores in
19 cities by year end, with the full line of Sprint products and services expected to be
available in as many as 4,500 additional stores in 1997. “Sprint has a strong brand equity
and this partnership extends that equity into the retail marketplace,” said Leonard Roberts,
president of RadioShack and Tandy Corporation. “We believe that Sprint and
RadioShack will redefine how consumers deal with communications providers for

the next century.”

Sprint Spectrum is ahead of the pack because its brand name is already in use in the
Washington/Baltimore market, and its presence in 29 markets will help distinguish it on a
national scale. “It’s one of the few national brands in the telecom sector,” Sukawaty
said. “There is a huge advantage to having a nationwide spectrum. We’re in the best

position to offer nationwide service and make roaming truly seamless for the first time.

Finally, a last element of Sprint’s strategy is a unique approach to service bundling given
the company’s affiliation with three cable TV operators. As a matter of fact, Sprint PCS
will provide:

0 nationwide PCS wireless service

0 Residential wireline type services

119

0 Sprint long distance services

0 Entertainment products

Conclusion

Although the case of Sprint Spectrum is not representative of all the entry strategies of
PCS providers ——we have outlined their diversity— this analysis supports the conclusion
drawn from the previous sections. Sprint’s strategy reflects the important orientation that
we have discussed. Although it has the lowest prices, Sprint does not seem to be leading a
cost strategy. Or at least not cost only. As a matter of fact, Sprint develops a
differentiation competitive advantage. Finally, its strategic choices reflect the change in the

industry which has suddenly become customer-focused.

5.3.2. AT&T Wireless

 

The case of AT&T will be developed in a different way to provide different results. We
have seen in the competitor analysis that being a pure PCS player as opposed to a PCS-
and-cellular player had an impact on the firm’s competitive advantages and strategy
formulation. Particularly, the positioning of PCS will be different. Usually, PCS is
assimilated to cellular rather than standing as a distinct competitor. AT&T’s market

positioning for PCS is a case in point.

120

5.3.2.1. Company profile

AT&T Wireless Services Inc., formerly McCaw cellular Communications Inc., consists of
four business groups which include cellular, messaging, wireless data, and aviation
communications. The cellular group provides cellular service to more than 6.5 million
customers in 107 license areas throughout the US. In addition, the company’s network is
connected to more than 5,000 cities throughout North America through the North
American Cellular Network. In March 1995, AT&T spent $1.7 billion for 21 broadband
PCS licenses. With the addition of the new licenses, AT&T Wireless Services will serve 25

of the top 27 US. markets with more than 200 million POPs.

In October, AT&T Wireless Services launched its nationwide AT&T Digital PCS service.
The new service includes caller-ID, PCS messaging, voice mail with message waiting

indicator, longer battery life and fraud protection features.

Table 22 - Major PCS markets of AT&T Wireless.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MTA POPS in millions
Chicago 12.07
Detroit 10.00
Charlotte 9.75
Boston 9.45
Philadelphia 8.92
Washington DC 7.77
Atlanta 6.94
Cleveland 4.94
Cincinnati 4.71
Saint Louis 4.66

 

Source: FCC

121

5.3.2.2. Strategy for PCS

AT&T has started an aggressive phase for the buildout of its PCS network. The
technology chosen is TDMA lS-136. In the first phase, AT&T plans to build out the
largest cities in each major trading area and the highways. linking those cities, said Steve
Hooper, president and CEO of AT&T Wireless Services. AT&T anticipates a fast
buildout, with plans to deploy as many PCS sells in 18 months as it has deployed in the
past 12 years in its cellular market, said Nick Kauser, executive vice president and chief
technology officer. This will be possible thanks to partnerships with utilities and other
entities that simplify antenna siting issues, and to the small footprint of digital equipment.

The first phase is expected to last about two years he said.

As it builds its PCS markets, AT&T is also upgrading its existing cellular systems to
TDMA in an effort to provide seamless digital wireless coverage to 80% of the country.
According to AT&T, once the networks are in place, both PCS and cellular markets will
offer similar feature sets that are transparent to users. “There will be no distinction
between PCS frequencies and cellular frequencies,” said Wayne Perry, vice chairman of

AT&T Wireless. “Customers don’t care what frequencies they are using.

AT&T’s strategy with PCS clearly is to fill the holes in its cellular coverage in order to
have a nationwide footprint. “With an already broad-reaching cellular network
presence that is being augmented by PCS property buildout, AT&T Wireless sees

strength in numbers: when its national network scheme is complete, the company’s

122

network will be accessible to 81% of the US. population. The company sees its brand

equity and solo efforts as a major force.” said Jason Meyer in Cellular Renovation.

Although this strategy seems perfectly clear, two questions come to mind. First, AT&T
contends that users don’t care about frequencies ——which is probably true— and presents
PCS just as an extension of cellular. However, because PCS and cellular systems operate
at different frequencies, the market may not be as homogenous as it seems. As a matter of
fact, PCS users won’t be able to use their l900MI-Iz phones in an 800MHz area unless
they have dual-frequency phones. If AT&T wants to integrate its PCS and cellular
operations it will have to deal with the dual-frequency constraints.

The second issue is about the positioning of PCS and digital cellular. I will tackle it in the

next paragraph.

5.3.2.3. Positioningissue: Mellular vs. PCS

In October, AT&T realized the aggressive digital roll-out in its cellular markets by
introducing enhanced services to customers in 40 cities at once. Until then, AT&T had
provided TDMA service to about 1 million customers in a handful of markets. The new
service, called AT&T Digital PCS uses the IS-136 TDMA service standard, equipped with
a digital control channel. It will allow users with digital phones and eventually dual-mode
AMPS/Digital phones to send and receive voice mail and receive numeric messages.

Message waiting indicators will also be available and caller ID in certain markets.

123

As we have seen earlier, AT&T has also committed to deploy TDMA in the market for

which it received PCS licenses. The PCS launches will start in the first quarter of 1997.

If analysts have noted the aggressiveness of the digital launch, the name of the service
certainly generated the most questions. As a matter of fact, as Chris Bucholtz highlights,
analysts were quick to note the confusion in AT&T branding the launch as PCS
service when it does not actually ride on the PCS frequency. Some said the company
is ignoring the actual frequency distinction between cellular and PCS in favor of a
marketing ploy. “How significant is this announcement? It’s not,” said David Goodtree,
director of telecommunications strategies at Forrester Research. “AT&T has been offering
digital services since it acquired McCaw, and it’s reaching these new customers with its
existing digital cellular, not PCS. It seems like a PR gambit that AT&T hopes will brace it

for the arrival of Sprint, PrimeCo and a lot of other competitors.”

The announcement is playing on semantics and means little Bucholtz says. But AT&T
chairman Robert Allen defended the move saying that service enhancements matter most.
“We know that these services can be provided using regular cellular frequencies, as long
as the provider is willing to provide the necessary capacity. Users don’t care about

frequencies, they care about services.”

In a rather ironical editorial entitled “By Any Other Name”, Steven Titch says that the
debate over whether AT&T’s digital upgrade is “genuine PCS” is symptomatic of an

industry that loves to talk to itself rather than customers. According to him, success will

124

hinge on customer experience and perception, not on how it’s classified. As a matter of
fact, customers will be able to judge the service by themselves. However, in a period of

high market confusion names can have a greater importance than Titch contends.

Conclusion

In terms of market positioning, while Sprint stands for the truly new entrant, AT&T is
representative of those who have to face the challenge of being an entrant as well as an
incumbent. For them, PCS is seen as a tremendous opportunity to expand in an emerging
market, but also as a threat for their existing business. AT&T’S example illustrates other
issues that have been analyzed throughout this study. First of all, the cellular industry is a
very dynamic one and the position of PCS in it is evolving. Second, “PCS vs. Cellular”
may not be the only way to frame the issue as it concerns the arrival of the new entrants.

Finally, AT&T’S strategy illustrates and explains the confusion that reigns in the industry.

Chapter 6

CONCLUSION

6.1. Findings

The analysis of the shape of competition in the emerging cellular industry —newly re-

formed with the introduction of PC S— led to the following conclusions:

0 The competitive landscape has been fundamentally transformed by the emergence of
PCS. Although recognized to be very promising for the industry as well as for the users,
PCS remains a very vague concept which tends to be interpreted in a variety of ways.
The growth perspective is very high and the fixture is seen in the mass market. The
nature of the industry is evolving towards a commodities industry. The cellular industry
is also not static and is evolving as PCS is being introduced (Chapter 1)

0 Competition is very intense. However, the structure of the industry and its growth
perspective promises high profits, and many competitors may continue to thrive.
(Chapter 2)

o The industry is emerging which brings Specific constraints and a great deal of

uncertainty. The competitive analysis has to be made in the light of a very dynamic

125

126

context. As industry competition is being shaped, early moves may not reflect long-term
strategies. (Chapter 3)

0 Given the industry structure and the market perspectives, overall cost leadership as an
entry strategy is unlikely. Contrarily, there seem to be many opportunities for
differentiation. However, the strategies will most likely not be pure but combinations of
the generic strategies identified by Porter. There will also be many opportunities for
niche strategies. Finally, as the cellular industry is opening to the mass market, strategic
vision is shifting and customer focus has become the key. (Chapter 4)

o The competitors are numerous and diverse. Each will formulate its strategy based on the
competitive advantage it is best positioned to develop. While we cannot make a broad
characterization of how competition will develop, because it will evolve differently from
market to market, carrier to carrier, business plan to business plan, some trends can be
outlined. Customer focus has become the key and differentiation is critical. Market
positioning of PCS by the entrants will be very different for those who have cellular
licenses. The cellular carriers who see opportunities as well as a major threat in PCS will

try to confuse the markets as concerns what PCS really is. (Chapter 5).

6.2. Limitations and implications

This study enabled us to identify trends in the evolution of competition in the cellular
communications industry and to assess the potential and likelihood of various competitive
strategies. However, this study is limited in several ways. First, because of the

confidentiality of strategic matters, all our conclusions remain very hypothetical. We can

127

make assumptions concerning the nature of the strategies that are developed but we have
no way to know what the competitors have really in mind. Second, what we have studied
here is the likelihood of different strategies to be developed. Although we have questioned
their potential as we looked at the rationale for adopting them, we did not really assess
their chances of success. It remains difficult to say who will succeed, and what
competition will look like in the long run.

Despite these limitations, this study provides tools for understanding how the competition
may evolve. The analysis of the potential and constraints of the various strategies for the
different player will enable to identify and understand the competitive moves of the
participants in the industry. Finally, by breaking down competition into the elements that

determine it, this study provides a basis for industry forecasting.

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