A Slow Climb from Wireless' Dark Ages

[Kenny]

Business Week

A Slow Climb from Wireless' Dark Ages

The U.S. badly trails its data-crazy First World peers.
Here's what has to happen before Americans can go beyond gabbing

Each month, Europeans send as many as 5 billion short text messages from their cell phones. In Ireland alone, 4.3 million messages are sent per day, even though the country's total population is 3.5 million. In Japan, wireless customers send photos and e-mail to friends and family through leading wireless carrier NTT DoCoMo's popular iMode service. In Canada, consumers are increasingly using their phones for interactive games. On Feb. 4, phone company Bell Mobility in Toronto reported cell-phone gaming now accounts for half of its network traffic, up from 14% last year.

In the U.S., however, many cell-phone users feel fortunate to get clear enough reception to take an important business call, let alone frivolously fire off messages and digital images to their friends.

Will America ever catch up? Could be: Signs are starting to appear that U.S. cell-phone customers may soon have access to the latest and greatest wireless services. Nextel, the No. 6 carrier, already has a network that is data-ready. Verizon (VZ ) in January launched its digital network, dubbed 2.5G, which will support many new interactive data services -- though for now it's available only to customers in metropolitan areas on the East and West Coasts. Sprint PCS (PCS ) will launch its 2.5G network nationwide this summer. Pending the availability of new data-ready handsets from Nokia, Ericsson, and Motorola, AT&T Wireless 2.5 G network is already in 30 major cities and will be available nationwide by yearend. And two other wireless carriers, Cingular and VoiceStream, plan to launch advanced networks sometime in 2003.

MONSTROUS MARGINS. The nagging question is whether enough demand will materialize to match this supply. Will American consumers take the time to manually punch in short text messages from their phones? (The word "hello" alone requires the pushing of 13 buttons.) And in a soft economy, will consumers rack up even higher cell-phone bills just to send digital photos or surf the Web from their phones rather than from their PCs?

If they do, analysts say, early movers such as Sprint, Verizon, and Nextel stand to benefit -- though not until 2005, when widespread consumer adoption is expected. For proof, simply look overseas: NTT DoCoMo has reported margins (before taxes, amortization, and depreciation) of at least 30% annually over the past three years, due in large part to its data-services business. Analysts estimate 12% of European mobile giant Vodaphone's (VOD ) total revenues, which amounted to $8.9 billion for the six months ended Sept. 30, stem from data services. That share is expected to grow to 25% by 2005.

The delayed rollout of wireless data services in the U.S. reflects a combination of complex technical problems and cultural habits. While it's easy for a Finn to send a text message to his French cousin, most Americans can send and receive messages only with friends and family who subscribe to the same wireless network. With more than 50% of American households connected to the Internet, it's easier -- and cheaper -- to keep in touch via PC than by wireless phone. (The opposite is true in Europe, where most people still pay per-minute charges for local calls and therefore spend less time on the Web.)

GOING TEXTUAL. Equally important is that, unlike their counterparts overseas, U.S. wireless carriers haven't aggressively pushed interactive data services. According to the Cellular Telecommunications & Internet Assn., the U.S. has 130.6 million individual cell-phone subscribers, still about 5 points short of the 50% penetration mark surpassed long ago in Japan and Western Europe. (J.D. Powers estimates that in terms of household penetration, in 2001 the U.S. reached 52%.) "There isn't the incentive in the U.S. to offer data that there is in Europe and Asia, where carriers need to find new revenues," says John Delaney, senior telecom analyst at London-based research firm Ovum. "When the U.S. starts to near the saturation point [of about 75%], you'll start to see U.S. carriers rolling out new services with a vengeance."

What will those services be? Analysts agree the "killer app" will include new communications services such as zapping digital photos and e-mail from phone to phone, not to mention instant messaging. "It has to be more than playing Space Invaders on my phone -- communications is what sells," says Andrew Cole, a wireless analyst at research firm Adventis. "We already all love voice. Text messaging and peer-to-peer gaming will be next."

History has shown that to be the trend. The Internet took off in the U.S. in the mid-1990s because of the popularity of e-mail. In Japan, NTT DoCoMo's iMode service grew from less than 5 million customers in January, 1999, to more than 30 million subscribers because it offers consumers an easier and less expensive way to send messages than traditional e-mail. PC penetration in Japan is about half that of the U.S., where nearly 60% of households have a Net connection. That's due in large part to price, because dial-up services charge consumers based on the amount of time they spend online. With iMode, phones are always connected, and consumers are charged only for the amount of data they transmit.

HANDSET HURDLES. Once the cell-phone craze catches on in the U.S., new services aimed at business customers also are expected to take off. CIBC World Markets analyst Harvey Liu projects that wireless data services will bring in $13 billion in new revenues for U.S. carriers by 2005. Of that, $7.7 billion, or 59%, will come from corporate users. The new networks will make it possible to use a cell phone to wirelessly connect a laptop to the Internet while waiting for a plane.

Another application expected to be popular is push-to-talk services, which essentially turn cell phones into fancy walkie-talkies. "The target subscriber is the guy who already has a pager, a phone, a BlackBerry [wireless e-mail device], and who isn't price-sensitive because his company pays the bills," says Liu.

Stumbling blocks must be cleared before Americans use cell phones to send messages more than to gab. Carriers still need to make their networks interoperable, so a Verizon subscriber can send a text message to a Sprint PCS customer. And they need to find the right price scale, so data services are affordable to the average consumer.

COSTLY SUBSIDIES. Moreover, for many of the new services to take off, carriers need to get a new generation of advanced, data-ready handsets into consumers' hands. That could make it difficult for carriers to hit their cash-flow targets in the second half of 2002, according to Liu. Handset subsidies are one of the largest costs in acquiring new subscribers. Sprint shells out $340 to attract each new customer -- of which $125, or about 40%, goes toward subsidizing the user's handset. New 2.5G networks will increase those costs by as much as $50 per subscriber. This at a time when cutting costs is essential in the battered wireless sector.

Still, Liu and others agree that up-front costs won't hold back the introduction of new services. After spending billions to launch their new networks, carriers are keen to reap returns as quickly as possible. With technical difficulties receding, only one challenge remains for the new services: persuading consumers to use them.


By Jane Black