By

Kim Bui

Jimmy Shih

Suet-Fei Li

Pushkar Ranade

Introduction: *

History *

Technical Description: *

The Current Situation: *

Strategies *

Conclusion *

References: *

Appendix *

When the Federal Communications Commission decided to hold back regulatory control of digital cellular standards, they had established the foundation for a huge economic and policy experiment on how technical standards will be set in a free and open market. This set the stage for a fascinating examination of how competitive strategies and technological development are both highly intertwined in creating sustainable competitive advantage in the information economy. Indeed, the information economy presents supporters of differing standards with many interesting challenges and obstacles to overcome. To succeed in the information economy, firms must develop competencies in managing lock-in and coping with switching costs, and to ensure that network externalities, standards, and compatibility all work to promote the interest of the company. What’s more, the information economy is characterized by having a tippy market that is governed by a winner take all market effect. This is why it is crucial for firms to engage in strategies that will tip the market in their favor otherwise they will be left with a "loser-gets-nothing" condition.

Establishing a winning standard can significantly alter the nature of competition by creating a larger market with less consumer lock-ins. However, standards in the network world ultimately lead to an even greater lock-in for a specific technology. This is why the three competing digital cellular standards are aggressively battling one another for market supremacy but not necessarily technological supremacy.

In this paper we examine the history of cellular communications in the U.S. and the economic, technical, and policy forces that eventually lead to the current standards war in digital cellular. We examine the paradox of having three different standards in a network economy and how public policies within the U.S. is contributing or hindering the adoption of a single standard. We also examine the different types of strategies being employed by the different standards champions to create positive feedback and network externalities. We then conclude with our prediction of what the future will bring in the digital cellular standards war and if whether the market can ever move towards adopting a single standard.

Existing analog cellular services in the U.S. provided by local telcos and their competitors were developed in the 1970s by AT&T. They started to be implemented in the late 1980s. They were implemented in a standard format and all telephones work with all analog cellular offerings. The standard is widely known as the AMPS (Advanced Mobile Phone Standard). The most important function of analog cellular technology was to add capacity to existing non-cellular mobile telephone service. It made car telephones affordable to corporations initially, and later as prices decreased, to residential consumers.

However, analog cellular services became so popular that there was a concern that capacity would be depleted, particularly in metropolitan areas. As a result, digital cellular multiplexing technologies were developed to add capacity. Digital cellular also offers customers added features such as caller ID, call forwarding and three-way calling, as well as handsets with paging and short messaging services into the handset via a liquid crystal display.

Digital wireless network standards are emerging that provide better network quality, clearer voice transmissions, more capacity and greater throughput than their analog counterpart. In July 1994, the Telecommunications Industry Association announced the adoption of the IS-95 digital CDMA cellular standard. This move dampened a main complaint from TDMA supporters that TDMA was a standard and CDMA was not. IS-95 is crucial in that it paves the way for long term CDMA advocates among the U.S. service providers to proceed with a CDMA upgrade and puts additional pressure on the few holdouts and undecided service providers. The bad news for consumers is that two U.S. standards exist, with no means to resolve their differences.

Three standards, IS-95 (which uses Code Division Multiple Access), D-AMPS (which uses Time Division Multiple Access), and the Global System for Mobile communications are battling to become the U.S. digital cellular standard. D-AMPS has been around longer and enjoys the merit of being backward compatible. As IS-95 service becomes widely available, the battle between the three standards over service quality, features and pricing will commence.

In many parts of the country all three digital cellular technologies are competing in the same city. Companies must realize that when they choose IS-95, GSM or D-AMPS, they will be locked into that particular technology because the digital portion of their dual-mode phone will not operate on the competing network.

In addition, IS-95 has won some important advocates in other nations, including the Russian federation, Korea, China and one of two carriers in the Philippines. IS-95 also has made important inroads in other industries as well including the wireless component of advanced cable-television systems from Cox Cable Communications and Time Warner.

On a worldwide basis, GSM is the digital wireless technology of choice, but its entrance into North America – where it is often known as PCS-1900 – has always been stunted by native options of D-AMPS and IS-95. In 1990 the European Telecommunications Standards Institute developed GSM. The standard has been up and running in Europe since 1991. The GSM market offers an interesting mix of established engineering criteria, hungry European vendors that offer good financing terms to service operators and inexpensive handsets due to manufacturing economies of scale to consumers. The North American GSM Interest Group has a solid chance of establishing itself as a viable competitor by offering an integrated local, long distance and mobile services.

The three digital cellular systems, D-AMPS, GSM, and IS-95, can be viewed as three stovepipe systems. See the diagram below. Each system uses its own cellular telephone handsets, its own base stations, and its own Mobile Switching Centers (MSCs). The cellular telephone handset uses a wireless link to communicate with the nearest base station. The base stations together provide wireless coverage so that the handset can move from one area to another. The base stations are connected to the MSCs through wired lines. The MSCs keep track of accounting and user information. Finally the MSCs are connected to the Public Telephone Network. All three systems work well. They all cost about the same. Each system uses its own standard. Therefore, a user of one system needs to go through the Public Telephone Network to communicate with another user of a different system. So even if these two users are right next to each other, they still need to go through the Public Telephone Network. In sum, these three stovepipe systems are about the same in terms of the services they provide to the users.

Figure 1: A View of the Three Digital Cellular Systems, D-AMPS, GSM, and IS-95.

These three stovepipe systems do use different wireless access technology for the cellular handsets to communicate with the base stations. The wireless spectrum is very expensive and limited. Therefore each system wants to support as many phone calls as possible for a given wireless spectrum. D-AMPS and GSM use a combination of Frequency Division Multiple Access (FDMA) and Time Division Multiple Access (TDMA) technologies. In contrast, IS-95 uses Code Division Multiple Access (CDMA) technology. FDMA is when different phone calls use different pieces of the frequency spectrum to communicate. TDMA is when different phone calls use different time slots to communicate. CDMA is when different phone calls use different spreading codes to share the frequency spectrum. The analogy of these three technologies is when many people want to talk to each other in a conference room. FDMA is when people gather at different areas of the room to talk to each other. TDMA is when people take turn talking. So you can combine FDMA and TDMA by having people gather at different areas and then take turn talking. In contrast, CDMA is when people use different languages to talk at the same time. So other people's conversations in other languages sound like noise with respect to your conversation. CDMA requires a wide frequency spectrum all the time, so it is difficult to combine CDMA with FDMA or TDMA technology. FDMA and TDMA are well known technologies. We have lots of experience building equipment for these two technologies. On the other hand, CDMA is a new technology and we only have limited experience with it. The main advantage of CDMA is that it can support more phone calls for a given frequency spectrum. So to support the same amount of traffic, CDMA can use less power and less number of base stations. Another advantage of CDMA technology is that it can provide better voice quality by eliminating the audible effects of multi-path fading. Even though the wireless access technology of these three standards are different, there is actually very little difference in the overall performance between these three systems.

Table 1: The Wireless Access Technology for the Three Digital Cellular Standards.

The standards war currently being waged in the digital cellular telephone market demonstrates the positive and negative effects of adopting a free market approach to standards setting. It also shows the subtle differences between technological evolution in a decentralized market versus a centralized market. The U.S. adopted a decentralized market approach that led to a battle between three incompatible technologies. In contrast to the U.S.model, the centralized approach in Europe eventually led to the endorsement of a common digital cellular standard. The European GSM standard currently has a large number of countries adopting it and providing spectrum to support its implementation.

On the other hand, the current situation in the U.S. is characterized by supporters of competing standards pushing their own technology, making strategic alliances and effectively employing strategies like preemption and expectations management. With three incompatible technologies, the battle seems to be between 'Rival Technical Leaps', although recently major players have talked about providing backward compatible products and easy migration paths to future standards.

The standards battle in the U.S. has spawned a whole spectrum of OEM's, service and infrastructure providers. Some of the major players in each camp are :

Having multiple standards for a common consumer application poses several problems for users as well as introducing unnecessary complications in the way digital cellular system operates. For competing suppliers, it is in their best self interest to have different standards. In addition, having competing standards is advantageous in that they no longer have to compete on price. For instance, since competition is restricted within each stovepipe, the suppliers do not need to engage in a negative sum price war. In fact, suppliers can make profitable returns if they compete against one another in developing better and more efficient technologies. Once a user is locked in to a particular technology, high switching costs will prevent them from switching to a rival technology. This represents a more appealing tactic for the supplier, but not a very efficient model for the end user.

From the consumer's perspective, the present situation is clearly not in their favor. Network externalities play a big role in this situation. Roaming is severely restricted by having competing digital cellular standards, since network externalities are limited to a particular cellular franchise territory. As a result, consumers in one service area would benefit if all competing cellular providers adopt the same standard. In this case, they could switch systems without having to change equipment.

Different cellular standards also create inefficiencies in the market place by requiring the deployment of redundant systems and networks. For example, if two users are on two different digital cellular standards, they have to go through the Public Telephone Network to communicate with each other even if they are in the same territory. This can be very inefficient and unnecessarily expensive.

In recognizing the shortcomings of central planning, the Federal Communications Commissions turned to the invisible hand of the free market when selecting a new wireless standard. The commission is betting that free market forces will work to ensure that the most efficient standards will eventually emerge among the competing digital cellular standards. Modern economic theory has for years depicted that in a perfectly competitive market, firms will produce the combination of goods and services most desired by consumers in the most efficient manner, and will offer these goods and services at competitive prices. In this model of perfect competition, the market will automatically achieve technological and allocative efficiency by participants pursuing their own self interest. In a free market, rent seeking companies will have an incentive to enter into production of goods and services that offers the greatest opportunities for profits. And consumers will purchase goods and services that maximize their utility.

However, in order for competition to bring consumers the highest level of utility in the most efficient manner, competing standards needs the flexibility and freedom to respond to market forces and demands. Flexibility in standard setting for digital cellular technology helps to eliminate artificial entry barriers by enabling competing standards to respond quickly to changing public demands for new and different services. More importantly, a flexible standards setting policy will enable competing standards group to introduce innovative services and technologies rapidly without bureacratic delays and costs. Any centralized standard setting body will clearly have difficulty in selecting the most efficient standard, and any standard it selects could eventually discourage or even prevent future technological innovation that would benefit the public.

Flexibility in technical standards setting gives competing firms the ability and incentive to develop and implement innovative, spectrum efficient, low-cost, and consumer responsive technologies. In the highly competitive wireless marketplace, competitive firms must be able to deliver these offerings without unnecessary delays or regulatory interference. For the different cellular standards we are examining, technical flexibility in establishing new digital cellular standards will give service providers the ability to try different technologies and to compete on the basis of their technologies. For example, some digital cellular service providers believe that CDMA will be the best technology for their services, whereas others favor TDMA or GSM technoogies. As a result, competition between the different technology platforms as well as competition among different service operators should ultimately lead to innovation and new services for consumers.

There are two instances of lock-in in the current digital cellular standard war. The first instance is that the service providers are locked-in by the OEMs to a specific digital standard. There are four reasons why the switching cost is high. First, the service providers need to replace the durable equipment like the base stations and the MSCs to change to a different standard. Second, the service providers need to re-train their employees to use a new standard. Third, the service providers need to move the existing information database to the new system. Fourth, the service providers might need to break the existing contractual commitments to switch. Therefore, each service provider is locked-in to its OEMs. The second instance of lock-in is that the customers are lock-in to a specific digital cellular standard. The degree of this lock-in is smaller but cannot be neglected. There are four reasons why the customers are reluctant to switch to a different standard. First, the customers may need to replace durable purchase like the cellular telephone handsets to switch. Second, the customers might lose their loyalty programs with the existing standard. Third, the customers might have to break existing contractual commitments. Fourth, the customers will incur search cost due to the uncertainty of using a different standard. In summary, the service providers are heavily locked-in by the OEMs to a specific standard and the customers are slightly locked-in to a standard.

Table 1: Reasons why the service providers are lock-in and reasons why the customers are lock-in.

There are two ways to manage and sustain lock-in to win a standard war: preemption and expectation management. Preemption is to move in first to the market and aggressively build an installed base to establish an early lead. Expectation management is to influence the customers’ expectations to the benefit the company. The OEMs use these two tactics to lock-in the service providers. In turn, the OEM and the service providers also use similar tactics to lock-in their customers.

The techniques the OEMs use for preemption are: using penetrating pricing, offering training programs, acquiring influential buyers, exploring untapped markets, and providing backward compatible products. The OEMs offer valuable discounts to compensate the service providers for switching. To make the technology migration easier for the customers, Qualcomm, the OEM for IS-95, offers a series of customized courses and programs to help them to learn about CDMA products and technology. To build an installed base of the customers, OEMs try to obtain the influential buyers by signing contract with the main service providers in a country. For example, Qualcomm has signed agreement with Sprint PCS in the US and Bell Mobility in Canada to supply high-quality CDMA PCS network and new CDMA digital Q™ phones. Note that Bell Mobility was using TDMA but decided to replace it with CDMA. This is one of the steps Qualcomm took to aggressively seize market share from TDMA. To further expand their customer base, OEMs are all eager to explore untapped and potentially very profitable markets in the third world, like China, India and Eastern Europe. For countries like China and India, their high population density and lack of traditional telephone access make wireless phone very attractive. And for the former Eastern European countries like Russia, the emergence of the newly rich creates an unsatisfiable appetite for luxurious high-tech communication devices. Nokia has supplied GSM in Russia, Hungary and Argentine. Lucent has also pushed GSM to India, China Singapore and Russia. Qualcomm was quick to catch up on the third world markets by signing contracts with the major communication companies in China, India and Russia. In order to offer a smooth transition from the analog technology, the OEMs for all three standards provide backward compatibility for their product. D-AMPS is a dual-band (800 MHz and 1900 MHz) and dual-mode (analog and digital) standard which operates across all stages of analog-to-digital phasing within the networks. It also offers full inter-operability between AMPS/TDMA networks. Many existing GSM systems also support similar capabilities. Qualcomm's new QCP-2700™ is a CDMA digital dual-mode (analog and digital), dual-band (cellular and PCS) phone, which offers customers the ability to roam freely in either digital or analog cellular coverage areas.

Expectation management is the second tactic used by the OEMs to lock in the service providers. To improve the current infrastructure, the OEMs are working on the third generation (3G) wireless technologies with even broader bandwidths. The goal is to provide high-speed data rates to support applications such as wireless video, multimedia and Internet access. Proposals to define third-generation standard were made by different groups. Most of them are based on some version of CDMA.

D-AMPS radio access will be evolved in two ways: as D-AMPS++, which is optimized for use in the existing spectrum, and as a new Wideband CDMA (WCDMA) access. These developments will allow D-AMPS wireless networks operating in the 800 MHz and 1900 MHz as well as the new 2GHz frequency bands to handle high-speed data and multimedia communications.

GSM is moving toward High Speed Circuit Switching Data (HSCSD), GPRS (General Packet Radio System), and W-CDMA (Wideband Code Division Multiple Access). WCDMA has such CDMA systems features as efficient high frequency utilization, anti-interference and anti-fading. Moreover, transmission performance deterioration due to frequency selective fading is suppressed. WCDMA is backward compatible with TDMA.

As for IS-95, leading cdmaOne vendors are collaborating with the CDMA Development Group (CDG) and standards bodies worldwide to develop a 3G system based on the technology. This approach is backward compatible with IS-95. It aims to build on the CDMA technology with higher-speed data and even better capacity.

At the same time, the OEMs and the service providers are also using preemption and expectation management to lock in their users. For preemption, the service providers use aggressive penetration pricing scheme to attract customers. Their introductory bonus includes free phone with services, free air time, free try-out etc. They also try to establish service contracts with big influential corporate customers.

For expectation management, the OEMs form allies to support their respective technologies. In the mean time, the OEMs boast the superiority of their respective technologies to differential their products from those of the competitors. Apart from the unique benefit from the loyalty of the existing AMP customers, D-AMPS OEMs claim that it is the only global wireless communications standard that offers packet data services on the same network infrastructure. Moreover, they said that D-AMPS is the only wireless standard that allows all services, with service differentiation and location identification, to be provided via a single standard.

GSM OEMs claim that it is the only standard that fully specifies the complete network architecture. Other technologies specify only the radio access or air interface. The GSM specification is based on standardized, open interfaces. This has promoted the creation of a multi-vendor, competitive market environment. This means that the GSM market for both infrastructure and terminals is extremely cost competitive.

Qualcomm promotes IS-95 as a superior new technology that delivers capacity at least three times greater than that of other digital technologies, and 10 to 20 times that of analog technology. In addition, it claims that IS-95 is the only technology that doesn't require frequency planning to efficiently utilize spectrum allocation and offer service to many subscribers.

OEMs also claim that they have a big and growing user base and are winning the standard war. Nokia claims that in July 1997, there were 5.2 million D-AMPS (IS-136) end users in 34 countries. Moreover, it argues that since D-AMP allows smooth migration from analog AMPS networks, it is particularly appealing to the existing subscriber services. There are 76 million AMPS subscribers which translates into almost 50 percent of the world market.

Lucent claims that GSM is now the European digital standard. In addition, many Asian countries have adopted GSM, including Singapore and India. As of August 1997, more than 110 countries and 51.5 million people were using GSM. It's expected GSM to cover 50 percent of the world’s wireless market by the year 2000 and include over 300 million customers by 2001.

Qualcomm also claims the success of IS-95 outside of European market and the world's warm acceptance of the new technology. They announced that In the United States, over 55% of 34 million users of cellular phones have committed to CDMA deployments, including the country's 11 largest cellular carriers. And internationally, Hong Kong and Korea are already offering commercial service to over 400,000 subscribers. Trial systems in over 40 countries are also to be deployed over a five-year period. In order to create a unique, hip and cutting-edge image of the company and its technology, QUALCOMM has recently launched a multi-million dollar national ad campaign promoting its new CDMA digital Q™ phone. The campaign includes a "cool" TV commercial as well as a series of arresting, full-page print ads in major publications. The campaign highlights the Q phone's small size and Internet access capabilities. In addition, Qualcomm also purchased the 20-year naming rights to San Diego's only major-league facility as a part of the effort to develop a well-known brand name.

Economic theory has taught us that if a common standard is economically efficient for a product or service, market forces will lead producers to adopt the optimal common standard voluntarily. Public policies should be enacted to enable the efficient allocation of resources to promote a standard that the market deem optimal. With this policy in place, it has been left up to the individual standards champions to deploy their own strategies that will shape the standards landscape for digital cellular communication in the U.S.

In the short run, we can expect the IS-95 to gain popularity for certain mobile applications in the U.S. digital cellular market. Some of these reasons include:

However, with more than 15 million handsets in use worldwide, the GSM standard is well established to the point that new carriers are buying into an established equipment market. The potential to use equipment that is further down the cost curve is very attractive for many GSM service providers.

We believe that the market can sustain three digital cellular standards. There is no clear winner for this market. The three standards will co-exits because there are too much investment made by the producers in the existing infrastructure (cellular telephone handsets, base stations, and message service centers). These three systems can interoperate with each other through the Public Telephone Network, so the users really don't care if there is three standards in the digital cellular network. Beside, there is not enough incentives for the produces (OEMs and Service Providers) to have one standard.

We have learned that having three different standards is bad for consumers and good for the producers because producers can charge higher prices through product differentiation. Therefore we don't see the convergence to one standard as a plausible outcome in the U.S. digital cellular standards war. For example, GSM will continue to garner a decent following because it already dominates the world market for digital cellular telephone. The case for D-AMPS or IS-95 is still unclear at this moment. If one of these two standards disappears, then it would be interesting which of the remaining standard would take its place.

What we can take away from this case is that having superior technology is just one part of developing a successful strategy for winning the standards battle, albeit an essential one. To win a standards war, marketplace tactics are equally important for success. As long as each competing standard can maintain a growing consumer base they have little to worry. We have seen that the proponents of each digital cellular standard have been trying to lock in customers and provide new features to their products in an all out effort to increase adoption by marginal customers. The proponents of the various standards have been actively publicizing the wide reach of their calling area and other features like backward compatibility, in their campaign to dampen switching costs. Ultimately, all players in this industry will work towards easing the transition from one technology to the other and offer a migration path to a common standard if one is ever adopted.

http://www.qualcomm.com
http://www.nokia.com
http://www.lucent.com
Hal Varian &Carl Shapiro,Information Rules
David Messerschmitt, Computing meets Networking
Lucent Technologies: www.lucent.com
Qualcomm: www.qualcomm.com
Andrew S. Tanenbaum,Computer Networks, Prentice Hall

CDMA is a form of spread-spectrum, a family of digital communication techniques that have been used in military applications for many years. The core principle of spread spectrum is the use of noise-like carrier waves, and, as the name implies, bandwidths much wider than that required for simple point-to-point communication at the same data rate. It has likewise been chosen for deployment by the majority of the winners of the United States Personal Communications System spectrum auctions.

• CDMA is altering the face of cellular and PCS communication by:
• Dramatically improving the telephone traffic (Erlang) capacity
• Dramatically improving the voice quality and eliminating the audible effects of multipath fading
• Reducing the incidence of dropped calls due to handoff failures
• Providing reliable transport mechanism for data communications, such as facsimile and intenet traffic
• Reducing the number of sites needed to support any given amount of traffic
• Simplifying site selection
• Reducing deployment and operating costs because fewer cell sites are needed
• Reducing average transmitted power