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Managing Innovation: Cases from the Services Industries (1988)

Chapter: Cellular Mobile Telephone Services

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Suggested Citation:"Cellular Mobile Telephone Services." National Academy of Engineering. 1988. Managing Innovation: Cases from the Services Industries. Washington, DC: The National Academies Press. doi: 10.17226/765.
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Suggested Citation:"Cellular Mobile Telephone Services." National Academy of Engineering. 1988. Managing Innovation: Cases from the Services Industries. Washington, DC: The National Academies Press. doi: 10.17226/765.
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Cellular Mobile Telephone Services JOHN H. DAVIS The cellular mobile telephone system is an American technology, driven by American need and created by American innovation. At a time when conventional mobile telephone service was available only to an elite few, the cellular concept promised a thousandfold increase in the availability of the service in the United States, but its birth encountered significant delays before it became a reality. Ultimately, more than a decade passed from initial proposals to implementation. With strong and continuing pressures from legal, regulatory, and competitive forces, cellular development has been characterized by delay, changing rules, and shifting market structures. This case will examine the genesis, evolution, and externalities of the cellular industry from proposals in the 1960s to the service that exists today. Although it does not provide answers, hopefully the case will stimulate discussions on a number of difficult questions: Could the long delay have been shortened? What roles did the participants have in causing this delay? Was delay inevitable given the legal, regulatory, and market forces of the time? How have these forces shaped and reshaped industry structure? Were the basic issues involved regulatory or were they technological? How were the public benefits of service weighed against the participants' issues? What was the effect of these forces on foreign companies selling in the United States? On U.S. companies selling in other countries? Is this environment conducive to the investment of resources by U.S. industry? BACKGROUND: CHRONOLOGY OF EVENTS TO 1968 After years of development and testing, mobile telephone service, that is, a service that allows people in cars and trucks to talk to land-based telephone 144

CELLULAR MOBILE TELEPlIONE 145 customers who are using ordinary telephones, was first introduced in this country by AT&T in 1946. A mobile user in those days had to select a channel manually, depress a "push-to-talk" button on the mobile unit, and place the call through a telephone operator. Thus, the early mobile service was much like the operator-based service provided by telephone companies before automatic dialing systems were available. As mobile service expanded, various technological advances combined to make it operationally comparable to the improving land-based telephone service. Throughout the history of mobile telephony, the increasing popularity of the service outstripped the capacity of available channels. By its nature, mobile telephony uses a scarce public resource-the radio spectrum. Because this resource is limited, much as land is limited, the history of the service is dominated by technological developments that attempt to make better use of the resource. Despite such innovations as splitting of channels in existing bands and the opening of new bands, channels remained overloaded, causing existing customers considerable difficulty in completing calls and causing extremely long waiting times for new customers to obtain service. In New York City customers could wait many years or even indefinitely to obtain the service. Mobile telephone service was offered by two types of service providers: (1) the local telephone companies or Wireline Common Carriers (WLCCs) and (2) the Radio Common Carriers (RCCs). The RCCs were established by the Federal Communications Commission (FCC) as a competitive force in the mobile market and were assigned a number of channels equal to the number assigned to the WLCCs. This early action taken by the FCC in 1948 to foster competition weighed significantly on the later events in cellular development. Long before the advent of mobile telephone service, privately owned and operated radio systems were developed for governmental, law enforcement, industrial, and similar organizations (e.g., police, taxi, ambulance). Over the years, the amount of spectrum made available for these private systems substantially outweighed the spectrum allocated for mobile telephone sys- tems. By 1968, a frequency interval of 40 MHz was allocated for private mobile systems and an interval of less than 2 MHz was allocated for common carrier mobile telephone systems.2 Despite this relatively large allocation of spectrum, the private radio users were forced by their large numbers to share channels extensively in urban areas. When a channel is shared, the users rely on cooperative "party-line" operation, which often results in interference and generally poor performance. As the private radio and mobile telephone industries emerged and grew, they put continuing pressure on the FCC for additional channels. Although their goals were in concert, they were actually in competition with each other for radio channels. In 1958 the needs of the mobile radio industries for new channels were considered by the FCC. The parties representing the mobile radio and tele

146 JOHN H. DAVIS phone industries were pitted against the television broadcast industry. After deliberation, the FCC determined that the public interest would best be served by allocating the spectrum in question to broadcast TV, creating the UHF (Ultra High Frequency) TV channels numbered 14 to 83. Because part of this frequency band was the one the FCC later proposed to reallocate for cellular service, the broadcast industry (in its opposition) was also to play a major part in the cellular proceeding. Another group to become a stakeholder in the cellular proceedings was the radio equipment manufacturers. Although uniformly supporting the al- location of additional channels for mobile services, this group would split into two camps: potential suppliers of equipment for cellular systems, who favored a large cellular allocation, and the suppliers of equipment for private systems, who favored an increased allocation for that use. During this pre-1968 period, AT&T made a series of requests to the FCC for frequency allocations in which to provide a high-capacity mobile tele- phone service (including the above-mentioned determination in 19581. Each of these requests was denied, primarily owing to conflicting demands (for example, broadcast TV) for the available spectrum resource. THE REGULATORY ARENA: 1968-1982 In 1968 the FCC initiated an inquiry to determine whether the upper part of the UHF TV band (channels 70 to 83 on the TV dial) should be reallocated from broadcast TV to mobile radio services. This 84-MHz interval, combined with other available frequencies, formed a 115-MlIz block that could possibly be allocated for mobile telephone, private mobile, and air/ground radio ser- vices. As might be expected, the broadcast interests vigorously opposed reallo- cation. All mobile interests, both common carrier and private mobile, strongly supported the proposed allocation (but with very different viewpoints). In 1969 the FCC held 2 days of oral arguments, and in May 1970, issued its First Report and Order.3 As proposed in the 1968 inquiry, it reallocated a total frequency spread of 115 MHz for mobile radio systems. As illustrated in Figure 1, the order proposed the allocation of intervals 64 MHz for cellular telephone service, 40 MHz for private mobile service, and 11 MHz for air and ground service. In addition, the FCC asked for recommendations on how this large amount of spectrum could be used most efficiently and for the greatest public good. In December 1971 AT&T responded to the inquiry with a technical de- scription of a cellular telephone system. The cellular system was developed by AT&T's Bell Telephone Laboratories and was a major step forward in mobile system technology. It was made possible by the emerging power of microprocessor technology and large software controlled switching machines.

CELLULAR MOBILE TELEPlIONE ,~ AIR /GROUND 147 FIGURE 1 Mobile radio systems fre- quency band allocation, 1970. Total 115 MHz. Although its distributed architecture initially required a large number of channels, it could multiply their usage to fuel continuing growth, through cell splitting. The proposed cellular system differed completely from ordinary mobile systems. As illustrated by Figures 2 and 3, instead of using a single high- powered transmitter to reach users within a range of approximately 50 miles, cellular systems distribute their channels among small areas, or "cells," throughout the total coverage area of the system. Because the cells are relatively small, low-powered transmitters can be used, and cells only a few miles apart are able to reuse the same channels for different calls. As a vehicle travels from one cell to another, the call in progress is automatically and imperceptibly "handed-off" to the next transmitter and a ~rat rl _ / L ~ '\~ - \<EL 1 - t~ - i ~...1_~ CHANNEL 2 20 - 50 MILES FIGURE 2 Conventional mobile telephone system. Mobiles 1 and 2 must operate on different channels to avoid interference.

148 JOHN H. DAVIS / :~ CHANNEL 1 <! CHANNEL 1 \ ~ ~ (REUSED) ~ ~ A i\ k ~- of) 1-10 MILES FIGURE 3 Cellular mobile telephone system. Mobiles 1 and 2 may operate on the same channels. different channel by software-controlled switching equipment. Whereas, in a conventional system a channel used in Philadelphia, for instance, cannot be reused nearer than New York, in a cellular system that channel can be reused many times in each city. Through a combination of channel reuse and the larger number of channels available, this system offered a thou- sandfold increase in available service. Because both the cost and the capacity of such systems increases with the use of smaller cells, it was proposed that larger cells (about 10 miles in radius) be used to limit cost at start-up. These would then be split to smaller sizes as the number of customers increased, with cells ultimately as small as 1 mile in radius. After the May 1970 reallocation of spectrum by the FCC from TV broadcast to mobile radio, individual mobile radio interests began to strongly express their views on how the spectrum should be split within the mobile radio community. A number of private mobile users filed comments, requesting frequencies for their particular service and attacking the viability of cellular service. Interestingly, Motorola, which was to become a pioneer in cellular development, was also the dominant supplier of private systems and generally favored the latter in allocation proceedings. AT&T, on the other hand, had few business interests in the private systems, and it consistently favored allocation to the cellular systems. Although this conflict was rooted in market strategy, it was often expressed as technological debate between AT&T and Motorola on the "right" cellular design.4 These debates were difficult for either party to win and led to

CELLULAR MOBILE TELEPHONE 149 additional delay in the rulemaking. Ultimately, the U.S. standards allowed a good deal of flexibility to accommodate such differences, and designs became more complex to maintain service compatibility despite different system designs. In addition to debates among the manufacturing interests, the RCCs, traditional competitors of the WLCCs, filed strong protests con- tending that they were entirely neglected in the allocation and that with no frequencies dedicated to them they would be put out of business. After more FCC orders and additional oral arguments before the FCC, a Second Report and Order was issued in 1974.5 That order, as illustrated in Figure 4, changed the allocation scheme to: · 40 MHz for WLCCs to provide a single cellular system per market area; · 30 MHz for private mobile systems; and · 45 MHz for reserve for future growth. Most of the interested parties filed for reconsideration of the FCC order. As a result, in March 1975 the FCC issued its "final" order, 6 changing the allocation to: · 40 MHz for any Common Carrier that qualifies to provide a single cellular system per market area; · 30 MHz for private mobile systems; and · 45 MHz held in reserve. The RCC industry, still dissatisfied, took the FCC's order to court. They alleged that although the 40 MHz was available to any Common Carrier, the practical result would be a monopoly for the WLCCs since all the technology belonged to the Bell System. At about this time, in an apparent contradiction to that allegation, American Radio Telephone Systems (ARTS), an RCC, filed for a developmental system in Baltimore, using the Motorola cellular technology. 45 MHz-RESERVE :: , . .. .............................................. :::::::::: :::::::::::::: :: A 30 MHz- PRIVATE :: : ::: I;.::::::::::: - -:: :.:,:.:-.:.:-:-:.:.:~ :: :. : . : :. :. :. :~: ::::::::::::::::::::.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:::: :: : :::: ;; :.:.:.:.:.:.:.:.:.:.:.:.:.:.:.: :.:::::::: -:-:: :: : :::::::::::::: :.:;::::: :.:::.:::.:....- ....:..:.:.:-.: ...-... \::::::::::::::::::::::::::::::::::::::~::::::::::::.:.:.:.:.:.::::.:::::::::] \::::::::::::::::::::::: :::::::::::::::::::::::::::::::::::::::::: :::: : ~- - - :.::.:' \ 40 MHz-CELLULAR . ~- -./ I::: . :.:.:.:.:.:.:.:.:.:.:.:.:.:.:.:::::::::::::::::::.~ . :.:: :~ FIGURE 4 Mobile radio systems fre- quency band allocation, 1974 and 1975. Total 115 MHz.

150 JOHWH. DAVIS In 1976 the U.S. Court of Appeals rejected the RCC argument. Although affirming the FCC's order, it reserved judgment on whether the plan would result in a breach of the antitrust laws thus inviting further litigation "down the road." Further, the court noted that because the FCC order provided for only one system to be authorized per market area, it was clear that applicants filing mutually exclusive applications for the same cities would cause lengthy hearing proceedings followed by appeals in virtually every large city in the country. At about that time, Congress took an interest in the problem, and in 1979, in an appearance before a House Subcommittee, AT&T proposed a new division of the spectrum intended to answer the Court of Appeals concerns and bring the service to market more quickly. The proposal, illustrated in Figure 5, recommended two systems per market area (instead of one) one for RCCs and one for WLCCs-maintaining the existing historical compet- itive market structure. In addition, all carriers would be required to sell to intermediaries for resale to ultimate consumers. As part of the proposal AT&T committed to first service within 2 years of the grant of a construction permit from the FCC, and to the construction of 35 systems covering 70 cities within 5 years. Following the congressional inquiry, in January 1980 the FCC opened an Inquiry and Rulemaking proceeding to establish general policy and rules for commercial service.7 In March 1982 the FCC issued an order that made cellular service to the public possible. That order, illustrated in Figure 6, allocated: · 20 MHz to W~CCs; · 20 MHz to RCCs; · 30 MHz for private radio; and · 45 MHz held in reserve (20 MHz "earmarked" for cellular). FIGURE 5 Proposed mobile radio systems band allocation, 1979. , ~ ~ .~, <,. ~ ..-..30 MHz-PRIVATE....\ 25 MHz-RESERVE ....................................... ~ ~ ~ i ~ ID MHz-CELLULAF . \\\\\ RCC

CELLULAR MOBILE TELEPHONE .............. .... 45 MHz-RESERVE ~\~ 151 FIGURE 6 Mobile radio systems fre- quency band allocation, 1982. The reduction of frequency allocations from 64 MHz per system in 1970 to 20 MHz per system in 1982 was estimated by AT&T to increase the per user cost, exclusive of the in-car unit, from approximately $650 to approx- imately $1,6008 (see Figures 7 and 81. Likewise, the increase in systems per market area obviously reduced market potential per system. These changes, "hammered out" over a decade of debate, led to changing technical stan- dards, new commitments, new cost assumptions, and, ultimately, to a new industry concept for cellular deployment throughout the United States. System Trials and Adoption of Technical Standards During the regulatory process previously discussed, the FCC attempted to confirm the validity and necessary standards for commercial cellular service by requiring developmental "trials" of the cellular concepts. In July 1975 AT&T [acting through Illinois Bell Telephone Company (IBT)] filed an application for a developmental cellular system in Chicago. Both the RCC industry and Motorola opposed the filing. This opposition, and a number of issues concerning the details of the trial configuration, caused a lengthy delay in approval. During this period ARTS filed for a developmental license in the Washington/Baltimore area, using equipment developed by Motorola. The FCC granted the IBT application in March 1977, and the ARTS appli- cation later in 1977. AT&T's Chicago trial was configured as a fully operational start-up cellular system. In its first phase the trial used approximately 100 mobile units to verify proper operation of all equipment and gather operational data for evaluation. In its second phase the trial offered service to 2,000 real cus- tomers. This phase was conducted to predict the potential penetration of

152 JOlINH. DAVIS cellular service into various types of business segments and to estimate the elasticity of the market to pnce, different types of terminals, and so forth. The Chicago trial system consisted of 10 cells, a switching center housing a large, specially programmed telephone switching machine (called a Mobile Telephone Switching Office or MTSO), and an installation and customer service center equipped to install and repair the 2,000 mobiles used in the trial. The performance of this system was generally considered excellent, and customer satisfaction with the quality of the service was extremely high. To verify the ultimate cellular configurations, using cells as small as 1 mile in radius, AT&T's Bell Laboratones constructed an experimental system in Newark, New Jersey. The Newark system consisted of a single 1-mile radius cell surrounded by six interfering cells located at the appropriate distance away. This was intended to show that the ultimate small-cell con- figuration was attainable in a real-world urban environment, and to refine the processes for locating the vehicle and handing it off between cells. Like the AT&T Chicago system, the ARTS system in Baltimore/Wash- ington was configured as a start-up cellular system, although one cell was 25 cn 5 20 o IL o en LO ~ 15 in =) I an ~ 10 llJ IL LLJ · 10 SITES AT START-UP · APPROX. 1600 SQUARE Ml LES \ · SHARED MOBILE TELEPHONE SWITCHING OFFICE TO 50,000 USERS _\ · MOBILE SET COSTS NOT INCLUDED · CHICAGO TRAFFIC DISTRIBUTION \ a - / ~An MH7 25 MHz - - -~ 30 MH_ MHZ . 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 3 4 5 6 7 10 20 40 50 70 100 NUMBER OF USERS, IN THOUSANDS (LOG SCALE) FIGURE 7 Cost sensitivity for spectrum allocation.

CELLULAR MOBILE TELEPHONE 2 1.5 in Ill z - LIJ cn en LLI N J o A 1 153 - · 70,000 USERS · EXCLUDING MOBILE SET COSTS - - - - - - · EXCLUDING ZONE-OFFICE TRANSMISSION FACILITIES · DEDICATED 1A ELECTRONIC SWITCH MOBILE TELEPHONE SWITCHING OFFICE ~ 1 1 1 1 1 1 0 10 20 30 40 50 60 SPECTRUM ALLOCATION IN MHZ FIGURE 8 Effect of spectrum allocation on investment. Operated for a time in a configuration simulating a mature (small) cell. It served some 50 mobile units and 50 hand-held portables. Although the AT&T and Motorola configurations differed, both supported the viability of the cellular concept and laid the groundwork for setting technical standards. These standards were developed under the aegis of an Electronic Industries Association (EIA) ad hoc committee and covered issues of interface compatibility between mobile units of competing systems. The standards were proposed to the FCC, which adopted them as part of its 1982 order. The Chicago market trial commenced in January 1979 and continued to be operated by IBT until October 1983, when it was replaced by a new system designed for commercial operation. The ARTS system commenced operation in late 1981 and was converted to commercial operation in De- cember 1983. Industry Evolution Based on the evolving standards for cellular applications, the FCC per- mitted applications for the top 30 markets on June 7, 1982.9 The first licenses were granted to the AMPS Corporation, a subsidiary of AT&T formed to plan, install, own, and operate cellular systems on a nationwide basis. As planning for the first group of systems moved forward, however, the dives

154 JOHN H. DAVIS titure of AT&T Operating Telephone Companies from the parent AT&T caused a major discontinuity. The AT&T-Justice Department Modified Final Judgement (MFJ) divested the Bell Operating Companies from AT&T as subsidiaries of seven Regional Holding Companies (RHC) on January 1, 1984. Cellular service was designated as a local exchange carrier service and, as a result, the AMPS Corporation was replaced by subsidiaries of the RHCs that ultimately specified and owned the new systems. As a result, the nationwide aspects of the WLCC service (equipment compatibility, nation- wide automatic roaming, standardized nationwide features and functions, uniform coverage standards, nationwide billing, and so forth) could no longer be dictated by one provider. This development had a significant impact on the evolution of cellular systems in the United States. The first commercial cellular system began operation in Chicago on Oc- tober 13, 1983. It was operated by Ameritech Mobile Communications, Inc., which was a subsidiary of Ameritech, one of the RHCs. The Ameritech system was followed in December 1983 in the Baltimore/Washington, D.C. area by an RCC system that was owned by a consortium of the Washington Post Company, Metromedia, and other local groups. A few months later, in April 1984, Bell Atlantic Mobile Service, Inc., an RHC cellular subsidiary, also began service in the Washington/Baltimore area, making it the first competitive market area in the United States. During the transition period between 1982 and 1984, the AT&T AMPS subsidiary, with encouragement from the FCC, negotiated settlements with other WLCCs for providing service through partnerships in most of the major markets. Table 1 lists examples of the settlements that were made between AMPS and the other WLCCs. The RCCs, on the other hand, had a more difficult time organizing their business relationships. Unlike the WLCCs, the RCCs had no unique operating areas or history of cooperation in offering telephone service. As a result, long and arduous negotiations ensued for ownership of many of the RCC cellular markets. During the next 3 years, while these negotiations were taking place, it was very difficult for an RCC to deal with the details of planning the construction of its system or to have meaningful contractual discussions with vendors of cellular equipment. Start-up of the industry was also affected by the difficult task the FCC faced in processing the large numbers of applications for cellular markets. Initially, the Commission required each applicant for a given market to submit an extremely detailed engineering plan for the design and construction of its system. The Commission reviewed these applications as a part of the pro- cedure for awarding the market to a given applicant. As mentioned above, the WLCCs had largely resolved settlement issues in the early markets. However, with no such settlements in place for the RCCs, the Commission

CELLULAR MOBILE TELEPHONE TABLE 1 Examples of Applicants and Settlements Between AMPS and Other WLCCs City Applications Final Ownership New York City AMPS Bell Atlantic NYNEX Los Angeles AMPS Pacific Telesis GTE GTE IDS Seattle AMPS New Vector GTE GET Whidbey Telco Dallas AMPS Southwestern Bell GTE GTE Lake Dallas Teleco Minneapolis AMPS New Vector Continental Continental United Scote Rice Telco Detroit AMPS Amentech GTE GTE Mid Cont. Telco 155 found itself inundated with applications for the early markets (194 applicants for markets 1 to 30, 396 for markets 31 to 60, 567 for markets 61 to 90~.~° As a result of this deluge, the Commission elected to use a lottery system to resolve mutually exclusive applications. Under this concept, if the appli- cants for a given market could not resolve their competing applications, the Commission ran a lottery to determine the licensee. Only a modest amount of information was required of each applicant prior to the lottery, so the Commission's processing load was substantially reduced. Since the cost of submitting an application was also substantially reduced, the lottery developed attributes of a modern-day "gold rush." Entrepreneurs, small investors, and major corporations all rushed to "sign up." More than 90,000 applicants filed for markets 91 to 305. It became clear that many of these individuals were not interested in building and running a cellular system but were principally driven by the financial benefits of winning the lottery for an important market. During this period of evolution in the industry, three major industry groups were also evolving in their roles within the cellular industry. The first, the Electronic Industries Association (EIA), had already played a key role in defining the standards for nationwide compatibility. During the early period of cellular evolution, the EIA continued to enter into issues of spectrum assignment and standards, often achieving a consensus among the manufac- turers of cellular equipment.

156 JOlINH. DAVIS The second group was the Telocator Network of America (TNA), a trade association that had represented RCCs for several decades. TNA had been vocal in demanding the split of spectrum into two bands and, in later years, became heavily involved in representing the RCC interests in having efficient and competitive interconnection arrangements with the WLCCs.~i A major new issue faced by TNA during this period was whether to include WLCCs in the association and how to deal with the long-standing distrust between the WLCCs and the RCCs. This issue became extremely complicated as the consolidation of market ownership began to take place in 1985, when a WLCC, Pactel Mobile Access Company, purchased the ownership of an RCC owned by Metromedia in the San Francisco market. Once Pactel re- ceived approval for this acquisition a flurry of acquisitions took place, es- sentially blurring the distinction between WLCC and RCC in the spectrum that had been so laboriously segmented by the regulatory process. During this period TNA spent much of its energy on internal debates of organization and membership scope, defusing its ability to have a major shaping impact on the cellular industry. Finally, a new trade association, the Cellular Telecommunications Industry Association (CTIA), was formed early in 1984. Although this group at- tempted to represent both WLCC and RCC interests in industry issues, it is viewed by a number of RCCs as still dominated by WLCCs. As a result there is a somewhat ambivalent attitude toward the organization from the RCC industry. Much of CTIA's effort has been spent on promoting the allocation of additional (reserve) spectrum and on pressing for legislation against eavesdropping on cellular calls. Thus, no powerful central authority or representative body has emerged to guide the relationships among participants in this increasingly segmented industry, which has had an impact on the ability of the user to have a nationwide service. When a cellular subscriber "roams" (leaves his or her home serving area and enters another serving area) it is possible for that subscriber to place or receive calls. However, the details of how the subscriber goes about this vary from city to city, depending on the arrangements made among individual system operators. This situation has made the service difficult to use, and has encouraged the fraudulent placing of calls by illegal roamers. It has also led to business opportunities, however. Several service firms have emerged to become "roaming clearinghouses." These firms attempt to handle the details of billing and customer authentication without requiring a detailed knowledge by the cellular subscriber of what transactions are required. Thus, even though cellular service was extremely fragmented as it emerged in the United States, job opportunities in the service industry did arise to help circumvent some of the problems.

CELLULAR MOBILE TELEPHONE 157 PRESENT STATUS Market Size Despite all the aforementioned problems, cellular systems have generally achieved increases in customer demand that exceeded expectations. Table 2 presents the results of a survey of 27 systems that had been in operation at least 3 months. This survey was conducted by Compucon on behalf of TNA and CTIA, the two trade associations described earlier. The subscriber levels achieved after 6 months of operation were 14 percent higher than originally forecast. In the three largest markets the average was 20 percent above the original forecast. Based on this favorable early experience Compucon (and many other market analysts) revised their S-year projections of the cellular market. Compucon's revised projections are shown in Table 3. The story is much the same regarding the level of customer usage and resulting revenues from such usage. In general, average customer usage exceeds the early forecasts. Although price wars between competitors and special price packages have reduced rates in different markets at different times, they have also stimulated the markets, and the net effect has been positive. Based on the results of the AT&T market trial in Chicago described earlier, the conventional estimate of market potential for cellular at the time of the first application filings was 2 percent of the population. Since that time, and TABLE 2 Original Forecast and Actual Numbers of Subscribers the First Two Quarters of Operation, 1986 Quarter 1 Quarter 2 Markets Forecast Actual Forecast Actual 1-3 5,165 6,198 9,191 11,029 4-10 1,441 2,190 2,765 3,041 11-20 860 1,084 1,699 1,648 21-30 623 716 1,167 1,191 TABLE 3 Revised 5-Year Forecast of Subscribers by Years, 1986 Markets Year 1 Year 2 40,000 14,506 4,992 4,932 Year 3 Year 4 Year 5 1-3 4-10 11-20 21-30 21,200 7,157 2,942 2,236 55,700 22,056 8,839 7,853 73,367 30,636 12,613 10,861 90,900 38,418 16,176 13,343

158 JOHN H. DAVIS currently, there have been numerous forecasts that range from today's 1.5 percent penetration in most markets to 4 percent or greater within 5 years. Table 4, a chronology of development of the technology and industry, reviews the full 40-year history of the industry. Although the simultaneous development of markets and technologies is frequently a slow process, reg- ulatory decision making necessary because of the fact that bandwidth is a scarce resource played and continues to play an especially important role in bringing cellular telephony to the public. The Cellular Manufacturing Industry The industry of equipment manufacturers who design and build the systems and the mobile units grew in parallel with the development of the cellular service industry. In the United States AT&T and Motorola became the major suppliers of systems, each supplying more than 30 percent of the current installed systems (the AT&T systems tend to be in larger cities, giving AT&T the greater share of equipment sales). Northern Telecom, in partnership with General Electric, Nippon Electric Company, Ericcson, Astronet, NovAtel, and CTI/E.F. Johnson share the remaining third of the market. The world situation is rather different. During the long period of delay in the United States the Japanese established standards, built operating cellular systems in Japan, and began to sell them successfully in the Middle East and Pacific regions. Later, as planning began for European and Canadian systems, U.S. companies were able to bid but have sold few systems to date. International sales are hampered by differing standards and the tendencies of countries to politicize this type of decision. In the manufacture of mobile units, U.S. fibs have fared even less well; only Motorola has achieved any significant success. The U.S. market, on the other hand, is shared by many manufacturers (see Table 51. Ironically, the other significant U.S. manufacturer of cellular systems equipment, AT&T, was excluded from the mobile unit market by the FCC in 1974.~2 The FCC took that action in an effort to prevent AT&T from being both a service provider and a manufacturer. As a result, AT&T was forced to share its technology with other sources, including Motorola and the Japanese, to assure the availability of mobile units for its systems. By the time this prohibition was removed in 1981,~3 AT&T was far behind the competitors it had helped to create. After an attempt to catch up it was forced to abandon its attempt to compete in this large market. FUTURE The suppliers of cellular equipment find themselves facing a new dilemma. The larger systems will reach their ultimate capacity within a few years,

CELLULAR MOBILE TELEPHONE TABLE 4 Cellular Mobile Telephone Development: Synopsis of Key Events 159 Background System Trials Technology Regulatory and Adoption Industry Key Event Development Arena of Standards Evolution 1946 Bell System initiates first FM mobile telephone service at 35 MHz (manual operation) 1948 AT&T Bell Labs invents transistor, allowing miniaturization of electronic equipment 1948 FCC establishes RCCs to compete with local telephone companies 1958 FCC decides in favor of UHF-TV channels 14-83 1959 Bell System initiates first FM mobile telephone service at 150 MHz (manual operation) 1959 AT&T Bell Labs proposes high-capacity mobile system at 35 MHz 1964 Bell System initiates first improved mobile telephone service at 150 MHz (full duplex operation) 1968 FCC orders inquiry to reallocate UHF-TV channels 70-83 for mobile radio use 1969 Bell System initiates first improved mobile telephone service at 450 MHz (full duplex operation) 1970 FCC reallocates 115 MHz bandwidth for mobile -radio services (64 MHz for common carriers) 1971 AT&T Bell Labs files technical description with FCC of proposed cellular telephone system at 850 MHz continued

160 TABLE 4 Continued JOHWH. DAVIS BackgroundSystem Trials TechnologyRegulatory and Adoption Key Event Development Arena of Standards 1974 FCC reduces its 1970 allocation to 40 MHz bandwith for common carrier use (one cellular system per market area) vat 1974 AT&T excluded from mobile unit market 1975 AT&T files for developmental cellular system in Chicago vat 1976 ARTS files for developmental cellular system in Washington, DC 1979 AT&T Bell Labs proves in cellular concepts at Newark, NJ, cellular test bed 1979 AT&T's Chicago developmental system operational 1980 FCC opens inquiry to establish policy and rules for commercial cellular service 1981 AT&T allowed to reenter mobile unit market 1981 ARTS' Washington developmental system operational 1982 Motorola introduces first hand-held cellular terminal 1982 FCC issues order to make commercial cellular service possible. Allows 2 cellular systems per market area with 20 MHz bandwidth allocated for each system 1982 EIA technical standards for cellular interconnection and nationwide service adopted by FCC ~ continued

CELLULAR MOBILE TELEPHONE TABLE 4 Continued Key Event 1983 1st commercial cellular system operational at Amentech Mobile Communications in Chicago 1983 First RCC cellular system operational by Cellular One in Washington, DC 1984 Justice Dept. modified final judgment designates cellular as a local exchange service. AT&T interests relegated to that of manufacturer 1984 Bell Atlantic Mobile offers first competing system in Washington, DC 1985 Pactel Mobile Access purchases RCC 1987 AT&T Bell Labs proposes compatible next- generation digital cellular system 1987 FCC opens inquiry on new cellular technologies 1987 One million subscribers using cellular service 161 Background Technology Development System Tnals Regulatory and Adoption Arena of Standards vie requiring more spectrum, narrower channels, and even smaller cells than were originally planned. Current systems were specified and designed during the 1970s and new opportunities such as narrow-band digital channels and distributed-control architectures have become possible. The FCC has recently taken an action that it hopes will encourage new technology. id It has proposed new rules that would allow cellular licensees to use advanced cellular tech- nologies and provide additional services. These new rules, if adopted, would remove all existing restrictions on channeling schemes and types of emissions and modulations techniques. As a further part of the proceeding, the FCC requests comments on the desirability of requiring some portion of the cellular frequencies to be maintained for service that conforms to present compati- bility and other technical requirements providing assurance for continuation of roaming for customers using today's systems. Given the fragmented nature of the cellular service industry, however, it will be difficult to reach consensus

162 JOHN H. DAVIS TABLE 5 Manufacturers of Mobile Equipment for U.S. Users Audiotel E. F. Johnson GE Hitachi NEC Mitsubishi Mobira Motorola NovAtel OKI Panasonic Tandy Toshiba Walker on a path to the future, and the need to coexist with today's systems and mobile units makes every new path complex and thus expensive for the developer. Superimposed on the domestic market is the enticing yet hazardous vision of the burgeoning international market. The variables for participation in that arena are mind-boggling and any manufacturer willing to enter that market- place will be faced with multiple technological policy issues. For example, a proposed Pan European cellular system contemplates using a state-of-the- art all-digital transmission scheme, which is totally incompatible with U.S. systems. Should U.S. manufacturers wish to enter that market, they face not only the traditional parochial obstructions but also the uncertainty about regulatory directions in the United States that would change standards to permit such systems domestically. Prompt domestic regulatory direction would remove one significant barrier. To the extent that such direction requires U.S. standards to be compatible with preliminary international standards, U.S. manufacturers will have the benefit of sharing the R&D costs over a much larger base. If, on the other hand, it were promptly determined that it was not in the public interest for U.S. standards to be compatible with the proposed international specifications, the opportunity would still exist to present the U.S. case before international decision-making bodies before their adoption of final standards. Initially, U.S. technology developed and encouraged the cellular industry. Two U.S. companies had the resources and willingness to pursue develop- ment through more than a decade of uncertainty. As the industry has grown and expanded, the external domestic and international environment has dra- matically changed. The U.S. cellular industry has reached another major discontinuity in its growth. The future is dependent on all the cellular stake- holders. The service providers will have to understand the importance to a healthy, competitive marketplace, of long-term as well as short-term technical advancements. Further, they will have to define and commit to the role they will play in advancing that technology either individually or through their trade associations. U. S. equipment manufacturers will have to decide whether they are willing to persevere with the financial and technological resources

CELLULAR MOBILE TELEPlIONE 163 to ensure a place in the domestic and international marketplace. Finally, the government must determine what role, if any, it should play to assure con- tinuation of a U.S. presence in the cellular field of the future. These issues must be faced promptly or they will be resolved by default- to the detriment of U.S. industry. ACKNOWLEDGMENT I am most indebted to Mr. Louis Weinberg, who served as the principal investigator and coeditor of this case. Lou was actively involved in many of the issues in AT&T's earlier cellular activities, and his insights have been most useful. Thanks, also, to Mr. R.H. Frenkiel, who provided many of the early innovations in the development of AT&T's cellular technology and who helped Mr. Weinberg in pulling this case together. NOTES 1. Channel bandwidth was twice "split" as the technology advanced, creating four times as many channels in the available spectrum. The first allocation at 35 MHz (35 million cycles per second) was supplemented by allocations at 150 and 450 MHz. 2. In this context, MHz is simply a measurement of frequency bandwidth. For example, each TV broadcast channel uses 6 MHz, although that same bandwidth can accommodate 100 or more narrower telephone or private radio channels. 3. An inquiry relative to the future use of frequency band 806-960 MHz 19 RR 2d 1663 (1970), 2nd Report and Order, 46 F.C.C. 2d 752 (1974), Recon. Granted inpart, 51 F.C.C. 2d 945 (1975), Afford. sub nom. NARUC v. CC, 525 F. 2d 630 (D.C. cir 1976), cert. denied 425 v.s. 992 (1976). 4. The major issue in these design 'differences" had to do with the propagation pattern of the cell-site antennas and the degree of channel reuse that could be tolerated. In later years it became clear that these extremely technical arguments were somewhat moot. 5. See Note 3. 6. See Note 3, 51 F.C.C. 2d 945 (1975). 7. An inquiry into the use of the bands 825-845 MHz and 870-890 MHz for cellular communications systems, 78 F.C.C. 2d 984 (1980); Report and Order 86 F.C.C. 2d 469 (1981); modified 89 F.C.C. 2d 58 (1982); further modified 90 F.C.C. 2d 571 (1982); appeal dismissed sub. nom, United States v. FCC, no. 82-1526 (D.C. cir. 1983). 8. AT&T estimated that the division of the available spectrum would significantly raise the cost per user, owing to duplication of facilities and less efficient use of channels. 9. By this time there were operating systems in both Japan and the Nordic countries. 10. It is an interesting phenomenon that the smaller the market size, the larger the number of cellular applicants. This fact flies in the face of earlier studies that indicated that the larger markets were much more profitable than the smaller ones. 11. The RCCs are dependent on their WLCC competitor's parent local exchange companies for the wireline facilities that connect their transmitting/receiving sites to the telephone network. TNA has continually complained that, despite a clear FCC mandate to do so, the local exchange companies have resisted providing the RCCs with the type of inter- connection arrangements they desire.

164 12. See Note 3. 13. See Note 7. 14. FCC GEN Docket No. 87-390. JOHN H. DAVIS BIBLIOGRAPHY Bell System Technical Journal. 58-l:January 1979. Business Week. Fewer busy signals for mobile phones. August 7, 1978, p. 60B. Business Week. The boom ahead in cellular radio. April 13, 1981, p. 124c. Business Week. Hello, anywhere. April 21, 1987, p. 84. Cooper, Martin. The sibling relationship of paging and cellular. Cellular Business. August 1987, p. 20. Frenkiel, Richard H. A high capacity mobile telephone system model using coordinated small- zone approach. IEEE Transactions on Vehicular Technology. May 1970. Frenkiel, Richard H. A high capacity mobile telephone system overview. Bell Telephone Laboratories, September 16, 1969 (private document). International Telecommunications Union. Mobile communications a status report. Telecom- munications Journal. June 1980, p. 386. Mobile Times. Cellular: Up and running at Illinois Bell. November 1980. Patrick, Dennis R. Cellular '86 New approaches to today's challenges. Speech by Com- missioner Patrick before the CTIA. Federal Communications Commission. December 4, 1985. Robinson, John O. Spectrum management policy in the U.S.: An historical account (OPP working paper series #15). Federal Communications Commission, Office of Plans and Policy. April 1985. Seneker, Harold. Beep! Forbes. September 3, 1979, p. 52. Television Digest Inc. Cellular radio: Birth of an industry. A special report from Television Digest, Inc., Washington, DC. August 1987. U.S. House of Representatives. Committee on Interstate and Foreign Commerce. Hearings before the Subcommittee on Communications. June 7, 1979. U.S. Senate. Committee on Commerce, Science and Transportation. Hearings before the Subcommittee on Communications. May 1, 1979. Vorhies, John. Comparison of Capacity and Demand for Determining Long-term Spectrum Requirements of Cellular Radio. Office of Science and Technology, Federal Communications Commission. December 1984.

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This book of case histories is devoted solely to service industries and the technologies that drive them, as told by those who have developed segments of these industries. The chapters cover innovations such as Federal Express's advanced system for package tracking, Citicorp's development of the Automated Teller Machine, AT&T's experience with mobile telephones, Bell & Howell's introduction of an automated automotive parts catalog, and the New York Stock Exchange's development of electronic trading. Some broader analyses discuss the interfaces between services technologies and manufacturing, operations research in services, and technology in professional services.

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