A Wired Nation Where Wireless Doesn’t Rule

As a businessman frequently on the road, Marco Navarro swears by his wireless phone. But that doesn’t mean he hasn’t spent plenty of time swearing at it, too.

“My main line is my cell phone,” says the Orange County computer consultant and entrepreneur. “It’s wonderful that we’re in an age when the phone rings wherever you are. But my calls get dropped one time out of three, and in the last month we’ve been having terrible echo problems on our service.”

Navarro’s irritations with his cell phone illustrate why the wireless phone business has grown more slowly in the U.S. than in any industrialized country.

Sprint PCS is the third wireless carrier Navarro has tried in the last few years--and he’s considering shifting to a fourth in his eternal quest for better service.

Such a move, however, would mean throwing away his current handset, because in the new age of digital cellular devices each company’s phones are usually incompatible with competitors’ networks. (It would also condemn Navarro to the chore of notifying all his contacts of his new cell phone number.)

To be sure, all of this is an improvement over the not-too-distant days of analog cellular service, when carriers were awarded only local franchises and using your phone on the road meant incurring unpredictable “roaming” charges based on the contracts each carrier had reached with others across the country.

“When I’d be in New York with my L.A. Cellular phone, it would cost $2 just to initiate a call and 80-90 cents a minute in roaming [charges],” Navarro recalls. On one working drive from L.A. to San Francisco, he passed through so many zones that the roaming charges alone came to $150 that day.

Navarro’s checkered experience with the technological marvel known as wireless telecommunications is undoubtedly old news to many of the more than 100 million wireless subscribers in the United States. It’s also an indication of why that figure isn’t higher.

About 36% of America’s residents subscribe to wireless phone service--a “penetration” rate less than half that of some European countries, and 15 to 20 percentage points lower than other tech-savvy nations such as Japan and Israel.

Forecasters say the gap won’t be closed any time soon: At current growth rates, according to the marketing firm IDC, wireless penetration at the end of 2003 will be 54% in Europe and 45.9% in the U.S.

Why does the U.S., which leads the world in its acceptance of such technological advances as the personal computer and the Internet, lag so badly in wireless communications? There are numerous reasons for the discrepancy, professionals say, including government policies, cultural habits and business rivalries.

Among the most important problems is the competition among transmission protocol standards, which prevents phones tuned to Sprint’s network, say, from working on AT&T;’s.

American carriers are split among three broadly defined digital technologies, which differ according to how they allow individual calls to coexist within their limited transmission capacity. Sprint, for example, uses a technology known as code division multiple access, or CDMA, while AT&T; is committed to time division multiple access, or TDMA. One smaller company, VoiceStream, utilizes a technology called global system for mobile communications, or GSM.

The latter is the standard used almost universally across Europe, which accounts for the wide compatibility of phones all over that continent.

Professionals believe that the three rival technologies will eventually converge or that new generations of phones will be increasingly capable of accessing more than one.

But one important reason why the U.S. lags the rest of the industrialized world in wireless usage is that its conventional phone service beats the rest of the world on price.

The average monthly charge here for unlimited local calling, according to Strategis Group, a Washington consulting firm, is about $18. In Europe and Asia, local calls are still metered at the equivalent of 2 to 8 cents a minute. At those rates, the American caller’s $18 charge would cover only 3 hours and 45 minutes to 15 hours a month.

That means that wireless calling is not much more expensive overseas than picking up a home phone.

“Overseas, if you’re paying for a local call anyway, wireless rates are comparable,” says Elliott Hamilton, senior vice president at Strategis. “That’s why you see [wireless] penetration of more than 60% for some Scandinavian countries.”

Some social and cultural factors may also make the mobile phone more attractive abroad.

One is the relative dearth of American-style single-family housing. Americans used to the privacy of a call at home don’t always relish sharing their cell phone conversations with strangers on the street; in lands where several generations of one family may live together, people sometimes find the anonymity of public places preferable to holding a conversation amid gangs of snoopy relatives.

Yet U.S. wireless growth has also been hampered by its regulatory history.

One bad decision made early in the life span of cellular service here, industry experts say, was the FCC’s decision to have cell-phone users pay for all calls, even those they received. That was a sharp departure, of course, from conventional phone billing, in which the caller pays. Not surprisingly, it was imposed at the behest of phone carriers who feared that the alternative would make cell phones too competitive.

That delayed the widespread acceptance of cell phones in the U.S. by years. To this day, it encourages many users to keep their phones turned off when they aren’t making calls themselves in order to avoid unsolicited calls, and discourages them from handing out their cellular numbers, thus rendering the phones less utilitarian.

The battle over incoming charges continues. Although many national carriers finesse the issue by making the first minute of any incoming call free--allowing subscribers some leeway to shed unwanted calls--the issue remains before the Federal Communications Commission.

“Many industry analysts and commentators anticipate that CPP [calling party pays] is the catalyst needed to create a significant increase in wireless usage by U.S. subscribers,” the FCC staff wrote in a memo last year, observing that wireless subscribers nearly doubled in some Latin American countries where CPP had recently been introduced.

But a proposed FCC rule change to allow wireless providers to introduce CPP is still opposed by some large phone companies, including SBC (owner of Pacific Bell) and U.S. West. The proposed liberalization has made virtually no progress at the FCC in more than a year.

Other regulations dating from the birth of U.S. wireless service in 1983 still affect consumer acceptance.

“The policies of the ‘80s produced the worst structure for wireless growth,” complains Reed Hundt, who was FCC chairman from 1993 to 1998 and is now a management consultant in Washington. “We’re still struggling with that legacy.”

At the outset of cellular service in 1983, for example, the FCC decreed that every metropolitan area would have two licensees: one an incumbent local phone company and the other a newly-licensed outsider.

That failed to provide enough competition within any area to encourage low prices; when the so-called duopoly regulations expired 10 years later the number of competitors shot up to an average of 4.5 per city. In some places today, consumers can choose from as many as seven carriers.

Another error of the duopoly model, Hundt argues, was that it assumed that wireless service would complement conventional wire-based service, not compete with it, and that it would be a local, rather than national or regional, business.

“So the licenses granted were of postage stamp-sized regions,” Hundt says. “But it’s a calling-from-your-car business, not a walking-around business. It’s something people actually do want to have working everywhere.”

The local licensing was the wrong model for a country as geographically sprawling and socially mobile as the U.S. The harvest was the checkerboard of roaming arrangements carriers were forced to strike with each other in order to provide coast-to-coast coverage.

That’s in sharp contrast to the experience of most countries overseas, which are small enough for carriers to easily provide nationwide coverage.

“We have a vastly larger area to cover than Europe’s,” says Callie Nelson, an analyst for IDC. “If you traveled a lot, it didn’t make sense to get a cell phone, because you’d have to call ahead to check if there was a roaming agreement where you were going.”

That has changed with the advent of such national digital networks as Sprint PCS, Verizon Wireless and AT&T;, but analysts believe the old format suppressed wireless growth for years.

Still, some experts say, the U.S. will eventually catch up to the rest of the world as competition among carriers heats up and wireless prices continue to drop. Wireless phones are also likely to evolve into smarter appliances, too, as more are sold with the capability of accessing Web sites and other data in addition to voice.

“We’re now on the path to stride ahead,” Hundt says.

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CELL PHONE RIVALRY

Despite a seeming glut of cell phones, the wireless business has grown more slowly in the U.S. than in any other industrialized country. An estimated 36% of America’s residents subscribe to wireless services, a rate dramatically lower than in European and Asian countries.

Finland in 2000 (estimated): 81%

United States in 2000 (estimated): 36%

(See microfilm)

Source: Strategis Group