Catching The Next Technology Wave

The new frontier of cellular telephones was McCaw Cellular Communications Inc.'s gold mine in the 1980s. The mother lode of the '90s, personal communications services (PCS), could be more of a mixed blessing.

This new form of cellular communications--using inexpensive handsets and low-powered "microcell" transmitters in office buildings and neighborhoods--promises to bring wireless calling to the masses. Someday, it could even become the telephone used at home and work--and just about everywhere else.

But the enormous promise comes with risks for existing cellular systems. McCaw and other cellular operators plan to participate in PCS and are free to use the new technology over the cellular radio frequencies they already control. But, having sunk billions into existing cellular equipment, they're in no rush to install more.

That could change by late 1994, when the first PCS networks are expected to come on line. At that point, a raft of new competitors could start selling cut-rate wireless phone service in existing cellular markets. The reason: While a PCS network functions like today's cellular systems--calls are handed off from one transmission tower to another as a customer moves from one cell to another--the economics of wireless communication will change.

Today's cellular networks use relatively powerful transmitters to relay signals across cells 20 miles or more in diameter. In PCS, the territory is broken into smaller pieces. Since callers are closer to transmitters, the handsets don't generate as powerful a signal. That means they can be smaller, cheaper, lighter, and have longer battery life. And the smaller cells give a PCS system greater capacity. The greater calling volume should spell lower per-call costs, which should attract more customers and push prices down further.

How the PCS market develops will be determined largely by the Federal Communications Commission. This fall, the agency is expected to spell out its plans to auction off radio frequencies for PCS. But there's no promise of an easy win for such deep-pocketed bidders as the new AT&T-McCaw combo, cable-TV operator Time Warner, or the Baby Bells. On the contrary, Congress is pressuring the FCC to give smaller companies a chance by allowing them to pay for their licenses in installments.

NEW RIVALS. More critical for McCaw is an expected FCC rule that would bar companies from bidding on PCS frequencies in markets where they already have cellular licenses. That provision would guarantee at least three new competitors to enter each of McCaw's markets. McCaw could still compete in PCS, but it would have to create its own PCS system over its existing frequencies by installing many more cellular transmitters.

No matter how the FCC proceeds, McCaw seems destined to face many more competitors in the 90 markets it serves in the U.S., meaning profits will be squeezed. "We're going to meet these people's price," says McCaw Vice-President Robert Ratliffe. But PCS represents opportunity, too: McCaw has a shot at getting PCS licenses in the 62% of the national wireless phone market its existing cellular network doesn't reach.

One possible FCC scenario could create competition that even the huge AT&T-McCaw team might find disconcerting: MCI Communications Corp. has put forth a controversial proposal for the agency to grant a tiny number of national PCS licenses, in addition to the regional permits. Under the plan, an MCI-led consortium could buy such a license, at a price that could total hundreds of millions of dollars. One consortium partner would handle the national marketing and help build the technology backbone, while small local operators would run the systems in their areas and share the revenues.

Whatever happens, PCS won't be an overnight sensation. It will take time and money--lots of it--to build extensive PCS networks. Wayne N. Schelle, president of Baltimore-based American Personal Communications Inc., which hopes to enter the PCS market, predicts that to cover a city the size of Chicago, PCS operators will have to set up at least 200 cells. With a single cell likely to cost about $250,000, that means a sizable up-front investment.

Indeed, companies experimenting with PCS are already seeking ways to hold down expenses. Among the options: piggybacking on cable-TV networks or building small networks in such areas as office complexes. Ultimately, these companies will find ways to make the wireless future happen. And the AT&T-McCaw alliance will have to find new ways to keep up.

BUILDING A NEW NETWORK
      In September, the Federal Communications Commission will decide how to divvy up 
      the market for personal communications services (PCS). Here's what the agency 
      is considering:
        -- Carving out niches for at least three PCS players per market
        -- Issuing a combination of national and regional licenses, far fewer of 
      which will be issued than the 734 cellular licenses granted
        -- Whether to bar cellular carriers from holding PCS licenses where they 
      already do business
      DATA: BUSINESS WEEK