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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
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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
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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.
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Representative terms from entire chapter:
cellular mobile
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 ~
'\~ -
\
148
JOHN H. DAVIS
/
:~ CHANNEL 1
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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
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