The Wireless Industry's Spectrum Shortage
For several years, the U.S. wireless industry has awaited a pronouncement from the Federal Communications Commission on which frequencies would be designated for the next generation of advanced mobile-phone services. That ruling was expected to provide key information to help carriers make decisions about building these systems. Getting the new frequencies would also help head off looming congestion problems in existing wireless networks.
The three biggest wireless providers, Verizon Wireless, AT&T Wireless (AWE ), and Cingular, figured they would have an answer sometime in fall 2001 or early 2002 at the latest. Then, on Oct. 5, the FCC announced that U.S. wireless operators might not get any additional spectrum until 2004 and didn't elaborate as to which spectrum frequencies it would choose, indefinitely delaying carriers' decisions on what kinds of equipment they need to buy.
The postponement could slow technological advances for the majority of the cell-toting masses. Verizon Wireless, AT&T Wireless, and Cingular have 27.1 million, 15.7 million, and 20.5 million subscribers, respectively, and hold 57% of the domestic wireless market. Yet analysts say at least one player benefits immensely from the delay: the fourth-largest carrier, Sprint PCS (PCS ).
Carriers generally have two choices when it comes to building next-generation, high-speed networks: One is cdma2000 (code-division multiple access 2000), licensed by Qualcomm (QCOM ). These networks, though more expensive to build, can function in any frequency range, including the spectrum in use now. And they handle traffic very efficiently, according to Anil Kripalani, senior vice-president in charge of global technology marketing at Qualcomm. While the other available technology can send one message through a communications pipe at a time, cdma2000 carriers can send four messages through the same pipe at the same time.
The other choice is WCDMA (wideband code-division multiple access, also licensed by Qualcomm). The technology is widely used in Japan, for instance, where dominant carrier NTT DoCoMo used it to roll out the world's first advanced-wireless network. But efficient functioning of this technology requires new, unused spectrum, and the allocation of that spectrum has now been put on hold. The shortage could cast a pall over the wireless futures of Cingular and AT&T Wireless, both of which have already laid down bets on WCDMA, say analysts.
Verizon Wireless could have similar problems. Half of its customers use rapidly aging analog networks. Verizon had hoped to buy additional spectrum to make it easier to migrate to an all-digital network with minimal impact on existing customers. But now the company must figure out how to manage the shift within the existing spectrum.
The notable exception to this quandary is the No. 4 carrier, Sprint PCS, which has 10.4 million subscribers. Sprint secured loads of spectrum in anticipation of a quick rollout of its data services. Now, spectrum scarcity has made Sprint's decision to build early look positively sage.
The company could pick up an additional 1% of market share in the next year alone, say analysts. That might not sound like much, but it translates into tens of millions in additional revenues. "We'll have a network that'll be able to support increasing demand and support a more robust set of applications," agrees Sprint Chief Technology Officer Oliver Valente, who hopes to roll out a next-generation network in 2002.
Still, growth for the industry as a whole likely won't grind to a halt. Regardless of the FCC delay, wireless revenues are expected to increase 84%, to $98 billion, in 2003, up from $53 billion in 2000, according to Morgan Stanley. Between the end of this year and December, 2002, the number of U.S. wireless subscribers is expected to increase 12%, to 146 million, according to communications consultancy Yankee Group.
Yet the use of capacity-thirsty data services -- only a small portion of wireless traffic today -- should overtake voice services by 2006, according to research by cell-phone and wireless-equipment giant Nokia. That means even with relatively stolid subscription growth, bandwidth demands could soar. Analysts say the three biggest carriers haven't secured the necessary spectrum to both add capacity and deliver new data-centric services, such as e-mail and simple Web browsing, that are expected to drive cell-phone demand in coming years. "It makes the entire growth path for a lot of these folks suspect at best," says Perry LaForge, executive director of the CDMA Development Group, an industry consortium for advanced wireless networks.
The carriers disagree. "AT&T Wireless is fortunate to already hold a rich portfolio of spectrum," says company spokesperson David Cauoette. "We are confident to execute our planned network migration." Carriers are also quick to point out that an Oct. 16 deal between Verizon Wireless, affiliates of AT&T Wireless, Cingular Wireless, VoiceStream Wireless, and NextWave Telecom will give the big carriers some extra spectrum and tide them over until the FCC's spectrum auctions are held.
That deal, however, hinges on approval from the government. And analysts say the extra airspace will help operators expand coverage only in New York and won't be enough in the long term. It doesn't address the root problem of allocating too little spectrum for wireless -- in sharp contrast to the situation in Europe. Customers there use only half the minutes used by U.S. subscribers, but carriers on the Continent have 320 Mhz of spectrum on average, vs. 180 Mhz in the U.S., according to Morgan Stanley.
Meanwhile, everyone from broadcasters to universities is lobbying to ensure that the FCC doesn't take their allocated spectrum and give it to the wireless carriers. Yet the wireless companies need more bandwidth -- as much as they can get -- to build so-called third-generation (3G) networks that provide improved data-transmission speed and augmented capacity.
The FCC could create a temporary solution by raising the limit on the amount of spectrum a carrier can own in a particular market, says Kaufman. That has prevented carriers from monopolizing specific geographical areas but has also capped capacity. If limits were lifted, carriers would be able to acquire more spectrum by gobbling up rivals. Carriers could also use expensive technologies to jam more traffic through their system without increasing spectrum usage, but that could lead to raising what many consider to be steep prices for wireless services.
The deadlock can't go on forever, and no one doubts that the FCC will eventually make the spectrum available. Says Andrew Cole of telecom consultancy Adventis: "The issue is when and where. It's a little bit of a stalemate right now." But that stalemate, if it lasts, could give Sprint a running start against its U.S. wireless rivals.
By Olga Kharif in New York
Edited by Alex Salkever
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