Sunday, October 06, 2002

So what is CDMA2000, anyway?

Steven Den Beste of USS Clueless has a piece on developments in the various 3G mobile phone standards - in particular how the American standard CDMA2000 seems to be winning over the European W-CDMA/UMTS. This is a follow up to this Economist article, and is an interest of mine as well. I wrote Steven a ludicrously long e-mail reply, which I think I might as well post here as well.


It was interesting to read your piece on CDMA2000. In my former job as a telecommunications analyst at CSFB in Australia, I also listened to a lot self-righteous patronising crap from GSM proponents, and I am feeling a little schadenfreude myself. I wrote a whole lot of reports a couple of years ago stating that I didn't believe that W-CDMA would work any time soon, and that IS-95 networks could be easily upgraded, and that therefore these networks were potentially very valuable assets, but it nobody much paid any attention at the time.(Of course, I lost my job in a massive downsizing, so in a way it barely matters, but I do now feel somewhat better....).

In Australia, we have a mixture of GSM and CDMA (IS-95) networks. At this point the GSM networks have most of the customers, largely I think due to Nokia's marketing skills. At the height of the boom, even the companies that owned the CDMA networks announced the intention of buiding W-CDMA networks and purchased 2.1GHz spectrum (admittedly fairly cheaply) in order to do so. The success of GSM in Europe, Asia, and Africa was such that everyone paid attention to its proponents, and paid little attention to anyone else. (Everyone particularly paid attention to Nokia). The lesson they took seemed to be that because GSM was so successful the people behind it were omniscient. IS-95 might have been the better technology, but networks that had adopted it in the past had lost out to those that had adopted GSM because everyone else had adopted GSM, and that UMTS/W-CDMA was the 'upgrade path' from GSM. Clearly everyone was going to adopt W-CDMA, so therefore we should do this too, and you couldn't even get people to talk about CDMA2000. a colleague of mine spoke to the CEO of a company (Telstra) that owned a IS-95 netowork, and he knew little about CDMA2000 whereas he had swallowed all of the hype about UMTS. His company is now becoming quite enthusiastic about CDMA2000.

Now the perception has collapsed, and people are looking at the actual technology again. This is great, as it means the of the telco/tech boom has now gone.

The whole story of what happened in Australia is quite interesting, so here goes. I have also posted this on my blog. (

(Bear in mind that I am not an engineer, although I do have a Ph.D. in applied mathematics. I am something of an engineer wannabe, however.)

In the analogue days in Australia there was a single AMPS network on 800MHz that belonged to then government owned then monopoly Telecom Australia (now Telstra). In the early 1990s the government decided to upgrade to a digital technology. Three licences were sold for 900MHz GSM spectrum. Telstra was compelled by law to upgrade to GSM, and to phase out and switch off its AMPS network by 2000. This seems to have been because the government thought that it wouldn't get a good price for the second and third GSM licences if the new players had to take on an entrenched monopoly, and forcing Telstra to shut down its AMPS network weakened that monopoly. Telstra was not permitted to upgrade its network to IS-136, as it would have liked to have done. (This happened in New Zealand, where Telecom NZ upgraded from AMPS to IS-136 and eventually built an IS-95 network alongside its IS-136 network). Three companies: Telstra; Optus (then owned by C&W, now owned by Singapore Telecom); and Vodafone set up GSM networks. The government announced that the reason for the switch off was to make the 800MHz spectrum available for newer technology, and it would be auctioned when available.

When the GSM networks went into operation, it became clear that GSM is a lousy technology for places like Australia, because Australia is enormous, and very sparsely populated. GSM works fine in densely populated Europe where base stations are close together, but it works very badly in situations where large cells are called for. (My understanding is that it fails when the time it takes for a signal to go from the base-station to the handset becomes comparable with the length of a timeslot, so it's a TDMA thing in general I guess). The fact that the AMPS network, which worked well with large cells in rural areas, was being switched off and replaced with GSM (which didn't work) enraged voters in rural areas, who had become used to having mobile phones.

Like rural voters everywhere, rural voters in Australia are upset about a lot of things. (which largely come back to the fact that agriculture is not a way to get rich in the modern world, whereas it was a century ago, and the importance of rural Australia to the country has been in decline for at least that long, but I digress). Rural voters are a political problem for the conservative government that has been in power since 1996 in particular, because rural voters have recently been flirting with parties of the far right instead of the traditional rural conservative party. In any event, in this case rural people really did have a point. The government therefore felt it needed to do something quickly.

The auction of the 800MHz spectrum took place, Telstra gained a licence and was encouraged (and subsidised) to build a national IS-95 network as quickly as it could. (Hutchison Telecom also purchased 800MHz spectrum, and built a second IS-95 network in the large cities, and signed a roaming agreement for its customers to use Telstra's network out of the cities). This solved the rural voter problem quite effectively, as IS-95 works fine with large cells. (Has this issue come up in the US? Surely it must have). Therefore, what we ended up with in Australia was a situation where Australia had two solely GSM operators, one solely IS-95 operator, and one operator (Telstra) that owned networks of both kinds.

What then happened was that the three GSM operators gained something more than 90% market share between them. Although Telstra caters to customers in rural areas if it has to, its profitability lies in customers in the large cities, as this is where the majority of the population lives, and the urban population is much richer. City people might like to pretend that they leave the city to experience the great Australian outback regularly but in actual fact they don't. Therefore, it doesn't matter to most of them that GSM phones do not work outside the cities. For the best customers, international roaming is probably more important, and this does work extremely well for GSM, and it is an issue on which the CDMA world has never seemed to have got its act together. For whatever reason, CDMA lost out badly in Australia.

I think the biggest reason behind this is simply that, for some reason, mobile phones turned into fashion accessories. People are very conscious of their brand and appearance, and it is very important to have a 'cool' . (I think this is even more the case in Europe and Asia than in the US). Cell phones almost became like watches. A $1000 watch probably doesn't tell the time any better than a $20 watch, but people are willing to pay the difference in order to have the right watch. The $20 watch may well have more features than the $1000 watch, but this doesn't matter, as the only features on their watch that most people ever use are the time and date. Nokia were first to understand that phones were like this too. (The Nokia 8210 is easily the most successful phone in recent years in Europe and Australia, but in terms of functionality, it is quite backwards. It can be used for phone calls and SMS messages and that is about it). The features that Nokia added were lifestyle features such as changeable ringtones, games, and the ability to change the casing of the phone to change its colour. Plus they concentrated their advertising on these lifestyle features. What they did was create a situation where if you are a high school student, it is social death to have a mobile phone that is not a Nokia. If you are a single woman, then the tiny little phone that goes in your handbag has to be a Nokia. Nokia have never struck me as having great engineering - Ericsson and Motorola seem to get new (technical) features onto the market much faster - but Nokia are great at creating demand for their phones. Despite having seemingly excellent engineering, Ericsson have produced phones that are ugly, and that has cost them. Motorola's phones are packed with features - my own phone is a Motorola for this reason - but they are less attractive and are weaker on the lifestyle front than are Nokia's. (Motorola have improved their game a lot in the last couple of years, however).

And in markets such as Australia, Nokia does not sell CDMA phones. Yes, they produce them for the American market, but in markets such as Australia and New Zealand, they do not sell them. When asked about this, they say that they prefer to concentrate their efforts on the GSM market. If you want to buy a CDMA phone, it will generally be made by a South Korean company - Samsung or LG or Hyundai. And while these companies make decent products, they are deeply unfashionable: they are brandnames associated with cheap cars and cheap televisions. People do not want this for a mobile phone. So they have lost out. GSM has the high prestige brands associated with it, and it has gained the reputation for a quality product, even though it is technically worse. (It seems foolish to me for Nokia to decide which of its products its customers want for them rather than letting them do this, but that's its strategy).

In Australia, Telstra responded to this customer preference by seeing its CDMA network as part of its universal service obligation and only really promoting it in rural areas, devoting most of its marketing effort to GSM, and Hutchison has simply tried to compete on price. (Its calls are cheaper than anyone else's).

In New Zealand, Telecom NZ have sold IS-136 and later IS-95, and have lost out in a similar way, although not as badly. Their only competitor, Vodafone, uses GSM, and Vodafone have done a far better job of marketing their service, at least partly by selling GSM as the world leading technology.

In 2000, vast sums had been paid in Europe for the 2.1GHz UMTS spectrum, and a similar auction was held in Australia. (They auctioned the 2.1GHz UMTS spectrum bands, but did not specify a technology). However, there were about the same number of licences as applicants in Australia, so the licences went cheaply. Telstra, Optus, Vodafone, Hutchison and Qualcomm all purchased 3G licences. Optus (who have 'vendor financing' from Nokia) and Hutchison (who have a global parent that intends to roll out UMTS networks around Europe) announced they would build UMTS networks quickly. Telstra and Vodafone said they would build UMTS with less urgency, and Qualcomm announced that it would build a network using 2.1GHz CDMA2000 and resell the capacity. The extraordinary thing is how amazingly detached the rhetoric was from reality at the time: Nobody had any idea what 3G was or was supposed to do, but they had already decided that UMTS was going to be the winner. Plus they had no idea of the value of the assets that they already owned. At the time, Telstra was fully talking the UMTS line, but in the two years since, their tone has changed a lot. They seem to have woken up to the fact that their IS-95 network is an asset, and it seems to be clear they will launch a 1x service before long. (Telecom NZ has already done so).

(There were lots of theories as to what Qualcomm was doing - my theory was that they wanted to adapt and demonstate their CDMA2000 equipment for the 2.1GHz bands that were being auctioned throughout the world by regulatory authorities who thought that UMTS would prevail put didn't feel the regulatory need to specify a technology, probably with China in particular in mind. Qualcomm have been quiet on this lately, which may suggest that capital is too expensive these days for demonstrations like this. If they were thinking about China, it may be unnecessary anyway, as China Unicom has a (quite new, probably 1X capable out of the box) IS-95 network in pace already).

I suppose the lesson to be learned from this is the same one that you are making, which is that it's a bad idea to try to pick winners. Australia, NZ, and a lot of Asia has IS-95 networks in place, even if these networks do not have huge market shares at the moment. If camera phone type applications become a big deal, as they appear to have done in Japan and Korea, then it will be very easy for these networks to be upgraded to CDMA2000/3G, and you will see an amazingly quick shift in the fortunes of the two technologies, as the infrastructure is already sitting there in most of Asia to allow this to happen. (There was an IS-95 network in Singapore that was switched off because it didn't have many customers. I wonder if they can switch it on again. Actually I doubt it as it was operating on 1900MHz and I think the spectrum was reallocated to allow overlapping 1800MHz GSM). If some companies get a big advantage from this, there will be pressure for competitors to upgrade too. This may lead to widespread 2.1GHz CDMA2000, as this is where the free spectrum is.

Actually, I think the shift in perception as to which is the successful technology has just happened. I think CDMA2000 has just won, and this will be common wisdom within six months. This leaves Sprint and Verizon in the box seat in the US. Asia is in a good position to adopt the technology because there is enough IS-95 in place to allow a fairly easy transition, but Europe is completely screwed, as it has committed itself to a technology that doesn't work, and it cannot fix this until very slow moving bureacrats change the rules. Plus there is so much bad money already invested that they will no doubt continue throwing good money after it for a while.

Just as a matter of interest, there is one interesting regulatory loophole in Europe for people who want to build CDMA2000 networks. The EC/EU only got involved in the spectrum allocation business for GSM, and prior to that allocation of spectrum for analogue services was a matter for national jurisdiction. (The resulting mass of incompatible analogue systems was one reason other than protectionism that we got a single European standard and a single European set of spectrum allocations for GSM) A lot of European governments allocated 450MHz spectrum for analogue services, and in a lot of cases this is still allocated and still subject to national rather than European jurisdiction. (This spectrum is also available in Russia and one or two places in Asia). In most cases it is at least theoretically legal for the owners of such spectrum to build CDMA2000 networks in this allocation. I know that Qualcomm have been working on developing hardware to work at this frequency, and there is also a variant of GSM designed for it. I don't know if anyone has the guts to take a gamble on building such networks in Europe, or if bureacracy would get in the way. (I think it might). At least in theory, however, it is a possibility.

I have spent the last nine months writing a book on digital television, and the European proponents of the DVB digital television standard sound exactly like GSM people. (Actually they are in many instances the same people, so this is perhaps not surprising). We will see what happens with this technology, too.

Update I have added a few more comments on this, including observations on what my related stock recomendations might be. I have also written another piece discussing the reasons as to why Europe's mobile phone market is now as schlerotic as it is.

Further update I am presently looking for a job. If anyone reading this page things they might know someone who would be interested in employing me, look here .

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