If Pfund is any indication, some of the nation’s wealthiest companies could be about to lose very large sums of money. On Dec. 5, the Federal Communications Commission opens the bidding for new wireless phone systems all across the country. The giants of tele-communications are poised to spend big–some experts estimate the value of New York-area licenses at 81 billion–for the right to spend billions more building networks to compete with cellular and wired phones. For customers, that will mean lots of new choices. But for the industry, the plunge into wireless is a high-risk exercise that is all but certain to cause fatalities. Says consultant Hershel Shosteck, “Nobody has any idea of what they’re going to do with [the license], how they’re going to use it, what value it has, if any. But they have to act now.”
Acting they are. Last week Sprint, the third-ranking long-distance company, signed a joint venture with cable-TV companies Tele-Communications Inc., Comcast and Cox Enterprises. A few days earlier Bell Atlantic and NYNEX, which run local phones from Virginia to New England, inked ties with Denver-based US West and Airtouch, a big cellular operator in California. The Washington Post Company, owner of NEWSWEEK, announced Friday that its American Personal Communications subsidiary will collaborate with BellSouth. These groups, and many others, will joust for 99 regional licenses to offer Personal Communications Services (PCS), a new generation of wireless devices with more flexibility than wired phones, better connections than cellular and, in theory, lower costs than either. (APC will also receive one of three licenses sold without bidding.) If you don’t like your local Bell, just wait. Competition is almost here.
Enthusiasts are convinced that the market for PCS is vast. “We’re all bullish on the industry,” says Arun Satin, planning director at Airtouch. Despite weak signals, broken connections and sky-high rates, 14 million U.S. households and businesses own cellular phones. PCS offers added attractions, from built-in paging to built-in voice mail to a number that will ring no matter where the user happens to be. If rates are low enough that Mom and Pop buy it, estimates William Bane of Mercer Management Consulting, 40 million families could be carrying portable phones within five years. “That is essentially a replacement of the existing telephone system,” Bane says. Companies that stay out could lose the future.
But some companies that leap in could lose their shirts. Here’s why:
When it gave away cellular licenses in 1982, the FCC allowed only two companies–usually, the local phone monopoly and one new-comer-to offer service in each area. The result: today’s eye-popping 70-cents-a-min-ute average cost for local calls. For PCS, though, the FCC is auctioning six licenses in each market, Whoever wins them won’t be able to spend years building networks, as the cell-phone companies did. With cellular already well established, the newcomers will have to get far-flung systems up and running quickly. A price war is all but certain; industry sources estimate that the cellular companies could slash prices as much as 75 percent and still turn a profit. Even the New York and Los Angeles markets probably can’t support six PCS services plus two cellular services plus the regular old phone company. Winners at the PCS auction must build hundreds or even thousands of small ground stations, knowing all the while that there isn’t enough business for everyone. “There’s definitely a feeling that you have to get out of the gate quickly,” says virginia consultant Thomas Stroup. A brand name is critical, which is why the cable companies joined forces with Sprint last week. AT&T, of course, already has a powerful brand. Another big player, MCI, isn’t expected to bid aggressively in December but to strike deals with the winners later, using its famous logo as a lure. The Bell Atlantic/NYNEX/US West/Airtouch consortium would seem to be at a disadvantage. So far, it doesn’t even have a name.
PCS started out as a low-cost way to overcome the shortcomings of cellular phones. But cellular hasn’t been standing still. Clunky tabletop units have given way to five-ounce portables. Older analog systems are being replaced by digital systems that offer much greater capacity and better connections. Cellular now offers so much of what PCS was supposed to provide that companies will offer cellular service in some cities and PCS in others, using phones that work on either system.
Many consumers are already comfortable with portable phones. That’s why marketers salivate over PCS. But don’t bet on PCS replacing home phones for years to come. One in three U.S. families now has a personal computer, and a growing number use modems to send faxes or communicate with other computers. Wires can handle that traffic better than radio waves. At home, “I don’t have a reason not to just plug it in,” says Dennis Hayes of modem maker Hayes Microcomputer Products. Then, too, there’s new wired competition. Cable-TV giant Time Warner is set to use its lines for phone service in parts of Ohio and in Rochester, N.Y. In Grand Rapids, Mich., City Signal hopes to compete with Ameritech (formerly Michigan Bell) by next March–renting Ameritech’s lines to link homes to City Signal’s switches. As such ventures proliferate, wired phones will offer far more options, including, eventually, video. PCS just can’t compete with those offerings, which is why Sprint’s wireless chief, Dennis Foster, speculates that PCS may work best as an adjunct to a wired phone rather than as a stand-alone service. “For the foreseeable future, PCS customers will also be wireline customers,” agrees Royce Holland of MFS Communications, a leading alternative phone carrier. But prices will have to be low to entice most consumers to buy wireless service on top of the wired line they already have, How low? Consider this: one fourth of New York Telephone’s residential customers aren’t even willing to pay 50 cents a month for a touch-tone phone.
Last Friday was the deadline for bidders to enter the auction. Now, in top-secret war rooms across the country, strategists are plotting how to win licenses without going broke. The FCC’s rules make that tough. Bids will arrive electronically each day, the numbers will be announced-and bidders will submit new bids a day later until nobody raises the price. Dozens of licenses are up for bid at once, giving rise to complex strategies: if Atlanta gets too pricey, a bidder can up the offer on Cincinnati instead. No sale is final until all the bidding is over, and even then most winners will be able to resell the licenses they’ve garnered. When it’s all done, Uncle Sam will be several billion dollars richer. And those famous names in telecommunications? Some of them will likely be richer, too. The others will be licking their wounds.
