The profusion of cellular-telephone networks has turned into one of the greatest business booms in recent memory. Started just 11 years ago, the industry has swollen to 12 million subscribers, 9% of the U.S. population, dialing up $14 billion in charges this year.
Which is why nobody wants to be left out of the next big wireless thing--personal communications services (PCS), a low-power cellular service envisioned as the mobile-phone network for the masses. When PCS was first sketched out a few years ago, industry prognosticators said there could be 20 million subscribers by 2000. So telephone companies, cable-TV operators, and entrepreneurs large and small are scrambling to bid in the Federal Communications Commission's auctions, starting in December, for 2,074 PCS spectrum licenses.
The auction frenzy has grown so intense that the FCC expects to rake in as much as $15 billion, $5 billion more than projected a few months ago. That's a nice bit of change for the federal coffers, and it'll go a good way toward making up for the giveaway of cellular frequencies in the early 1980s.
"JUST ONE OPTION." But if the auction prices hit the estimated highs, the economics of the fledgling PCS industry will have to be recalculated. True, PCS infrastructure is relatively cheap. John A. Roth, president of Northern Telecom Ltd.'s North American unit, which makes all types of wireless equipment, says the construction costs are about half those of cellular. But, he says, "when you sit down to figure out what the cost per subscriber of PCS will be, what you really have to look at is the cost of the license."
And it looks as if the cost will be high. There are, on average, 10 to 13 bidders registered for each of the first 99 major regional licenses to be auctioned off on Dec. 5. For a PCS system to break even, licensees should pay no more than $50 to $70 per potential customer in a given region, calculates Karen O. Nielsen, a senior analyst with Northern Business Information. "It's more likely, though, that spectrum will go for at least twice that," she says.
Add in the huge increase in wireless competition--three to six operators in each city once service starts, up from two now--and PCS no longer looks like another golden goose. Indeed, Time Warner Inc. and MCI Communications Inc. are both sitting out the auctions, figuring they're better off leasing space on a network that someone else builds, even if that cuts into profits. "You have to discount the potential for a higher operating margin against the capital outlay," says Dennis Patrick, CEO of Time Warner Telecommunications.
As for the other major wireless groups--the Bell Atlantic/Nynex/U S West/AirTouch venture called PCS PrimeCo, AT&T-McCaw Cellular, and GTE-SBC Communications--they see the auction primarily as an opportunity to fill gaps that exist in their current cellular networks. "The [PCS] spectrum is just one option we want to have to make our wireless networks more competitive," says Nicholas Trivisonno, GTE's executive vice-president in charge of wireless. The only bidders who say they plan to build a national PCS network are Sprint Corp. and its three cable-TV partners, who see it as an opportunity to combine voice and cable, and a group of minority investors who are new to wireless (box).
By shelling out billions of dollars just for a slice of spectrum, these operators start out with a big burden the cellular companies didn't carry (table). "In one broad stroke, the PCS spectrum auctions will cost almost as much as the cellular industry has spent in the last 11 years," says Salomon Brothers Inc. analyst Steven Schutzman. And industry executives figure that license acquisition will be just one-third of the cost of getting into the business. Research consultant Paul Kagan Associates estimates that building a PCS network could cost from $21 million for Tulsa to $420 million for New York. On top of that, PCS operators will probably have to surpass the $500-per-subscriber marketing cost that cellular providers now spend, just to establish an identity with consumers.
Such costs wouldn't be out of line if PCS operators intended to charge the same as cellular. But the new service was conceived as a much cheaper, and therefore more popular, wireless alternative. Although both use radio transmissions, PCS will transmit in the lower-power 1.8 gigahertz (GHz) range, compared with 800 GHz for cellular, so both transmitting towers and receiving handsets can be smaller and cheaper. And it will be all-digital right from the start, giving it greater capacity than the analog service still offered by almost all cellular networks. The PCS vision holds that consumers will rush to sign up for a ubiquitous wireless service that uses light, low-power phones plus pagers and personal digital assistants that can send and receive data--but only within local areas.
DIGITAL DRIVE. To create a mass market for PCS, analysts figure the price would have to be $20 to $30 a month--not much more than a regular local phone bill. The biggest PCS net so far, year-old Mercury One-2-One in London, owned by Cable & Wireless PLC and U S West Inc., is priced 30% to 40% below standard cellular. That has made it phenomenally popular--150,000 subscribers have signed on so far. But Merrill Lynch & Co. also estimates that Mercury One-2-One will lose $103 million both this fiscal year, ending in March, and the next.
All of which makes the profit outlook bleak. "None of the PCS providers are going to make a lot of money very quickly," warns Mark Lowenstein, a consultant at Boston-based researcher Yankee Group Inc.
And while PCS operators are getting started, cellular operators aren't playing dead. They're spending some $2 billion a year to upgrade their networks, adding digital technology that will increase capacity by 3 to 15 times. By the time PCS networks get up and running in 1997 or 1998, almost all of the nation's cellular networks will be digital-ready. And once they add digital, cellular operators will be able to cut prices and add many of the same data-transmission services that PCS is promising.
SBC Communications Inc.'s Southwestern Bell Mobile Systems subsidiary already offers a product called Freedom Link PCS, which allows subscribers to roam a corporate campus with a wireless phone. GTE has Tele-Go, a low-power wireless service available in 15 regions that uses the subscriber's home phone number. It works something like a wide-ranging cordless phone, and GTE calls it the "first PCS product," on the premise that the service deserves the name more than the spectrum. Looks like a cellular service by any other name can still be a gold mine, as long as it doesn't have to buy its own license.