FOOL ON THE HILL: An Investment Opinion
Wireless Standards Everywhere

While CDMA operators should have a nice competitive edge, technological standards alone won't determine the wireless winners. Rather, expect companies that smartly market services and execute the 3G rollout to prevail.

By Richard McCaffery (TMF Gibson)
August 31, 2000

If you don't eat, drink, and sleep wireless cellular standards, a brief rundown of the major technologies can't hurt, especially if it's brief and not too technical.

All around, the market values of wireless companies grow, like snowballs advancing down an endless slope. Wireless handset manufacturer Nokia (NYSE: NOK) expects there will be one billion wireless users worldwide by 2002, up from about half that right now. There's speculation that Verizon Communication's (NYSE: VZ) wireless division, which filed for its initial public offering August 24, will eclipse AT&T Wireless Group (NYSE: AWE) as the largest IPO in U.S. history. AT&T raised $10.6 billion through its offering in April, so the stakes are huge.

These companies want you to invest in their vision and their ability to execute against an unknown future, so it's best to know a bit about the technology before stepping up to buy a piece.

It's worth relating something I was recently told by an analyst at the Strategis Group, a telecom market research group. While technologies are important, they won't determine the success of any wireless company. Rather, success depends on business elbow grease: outselling rivals by segmenting customers, as suggested in a recent McKinsey Consulting report; offering better services; and executing smoothly as wireless penetration rates in the U.S. climb above 50% in the next five years. Standards are part of this, but not the whole story.

On a gut level, this makes sense to me. I can't think of many companies that created a better technology and rode off into the sunset with an insurmountable lead. Rather, companies with robust technology had a host of weapons behind the fort walls.

Much of the information in this report was taken from Annabel Dodd's excellent book, The Essential Guide to Telecommunications. If you're interested in learning about telecom, sleep with this glossy volume under your pillow.

Let me start with the different generations of technology, since wireless standards are to the different generations as the pea is to the pod.

First-generation protocols (1G) used analog technology. With analog technology calls are transmitted via electromagnetic waves. The standards used in 1G services were called analog cellular, or advanced mobile phone service (AMPS).

This worked fine until traffic increased and analog's less-efficient format consumed the existing bandwidth. The solution: digital. Digital signals are transmitted as binary bits. It's a faster, cleaner transmission technology. As a result, carriers rushed to roll out second-generation (2G) standards, digital networks that used one of the four standards in the U.S. today: GSM, TDMA, CDMA, and iDEN. More about those in a bit.

Now everyone's talking about third-generation technology, or 3G. Just as 2G technology brought lower prices and expanded services, such as call-forwarding and short-messaging services (SMS), 3G promises to bring high-speed services like video-on-demand and bona fide browsing services.

The 3G platform, a next-generation technology aimed at delivering high-speed services, will initially offer access speeds around 144 Kbps (compared to 2G rates in the 14.4 to 19.2 Kbps range), and up to 2.4 Mbps shortly after that. This is an enormous leap in speed and capacity, and should bring very attractive services to the palm of your hand. Expect the rollout of 3G services over the next two to three years.

As 3G is introduced, we'll again see new standards, such as wideband CDMA, and enhanced data rates for GSM evolution (EDGE), a protocol that's kind of a blend between GSM and TDMA. AT&T and SBC Communications (NYSE: SBC) have chosen this standard for their 3G services.

Investors should know the different standards aren't compatible -- meaning, for example, that a consumer with a GSM phone can't use it on a CDMA network. (Some industry observers believe GSM operators are at a disadvantage to CDMA and TDMA operators in the U.S. because GSM networks aren't as well built-out.) This means there's risk for any player if the standard it chooses doesn't become the standard. While it's a risk, I don't think this will happen. I see a world of competing standards, not a single unified protocol.

Here's a look at how many users each of the major digital standards claims worldwide, according to GSM World and EMC World Cellular Database Quarterly:

GSM: 331 million
CDMA: 67 million*
TDMA: 48 million

* CDMA is the fastest-growing digital standard
Here's a look at the national wireless players, the standard each has adopted, and 3G rollout plans as far as we know:
Company            Standard       3G                 
Verizon Wireless     CDMA       1XRTT* (1st phase 3G)
SBC/BellSouth        TDMA & GSM  EDGE
AT&T                 TDMA        EDGE
Sprint PCS           CDMA       1XRTT
Nextel               iDEN         ?
VoiceStream Wireless GSM         EDGE via GPRS**

* 1XRTT is the first phase of CDMA 2000, a 3G
  technology. It offers speeds in the 144 Kbps range.

**GPRS stands for general packet radio service.
  It's a technology that can be overlaid on GSM
  and TDMA networks and offers speeds in the
  115 Kbps range.
The three major wireless standards -- TDMA, GSM, and CDMA -- are basically different methods of multiplexing. What's that? According to Dodd, "Multiplexers are devices that transmit signals from two or more devices over a single channel." The upshot of this is greater capacity.

Each standard, however, mutilplexes in a different way, which is why they aren't compatible. GSM and TDMA are expected to hit their 3G heights using wideband CDMA, a technology they will migrate to using the EDGE standard, though it's still a bit unclear. GSM isn't efficient when it comes to delivering data, and TDMA can deliver short message services but not packet data.

iDEN is similar to TDMA but isn't compatible. Nextel Communications (Nasdaq: NXTL), which uses the iDEN standard, offers dual-mode iDEN/GSM phones, which allows roaming on the different networks. Some industry experts expect Nextel to migrate to 3G using the EDGE standard, much like their GSM and TDMA peers. Nextel's big issue is the need to acquire more bandwidth in upcoming auctions.

CDMA is arguably the most efficient, secure technology (in terms of encoding). It operates at lower power, which conserves batteries, and offers the highest capacity, which will mean a lot when billions of data bits start flowing over wireless networks. Again according to Dodd, where TDMA technology has three to five times the capacity of analog cellular, CDMA is expected to have at least eight times the firepower.

While the CDMA players aren't destined to succeed by virtue of the technology, it's probably safe to view it as a competitive advantage. This could be a good place to start your research.

(For a quick rundown of other wireless technologies -- namely, Bluetooth, WAP, and EPOC -- check out this story.)

Related Links:
  • Born to Be Wireless, Fool on the Hill, 5/22/00
  • A Wireless Whirlwind in 2000, Fool News & Commentary, 4/5/00