Standards Wars in Wireless Communications

1
Standards Wars in Wireless Communications

David J. Salant March, 2005
2
Introduction

• Mobile wireless communications industry has been
  locked in a series of standards battles for
  approximately 20 years.
• Currently, there are over 1.3 billion people
  using cellular and PCS service in the world.
• Gross new adds are approximately 500 M per year,
  and annual IP royalties likely exceed 5 billion.
• Licensing fees accrue to developers of standards
  in handsets and in terminal equipment.
• Network effects suggesting standardization
  include communication between individuals,
  geographical area of coverage and cost of
  complementary products (handsets).
• Telecommunications policy makers adopt different
  approaches
• Market approaches market can find the standard.
• Government mandate.
• Trade associations, not always voluntary.
• Competitive dynamics suggest tipping eventually
  result in a standard.
• Yet, at least in wireless, the market has yet to
  settle on any one standard for very long.

3
Some Related Literature

• Arthurs (1989) tipping effect of network
  externalities.
• Economides, Matutes and Regibeau on
  compatibility.
• Church and Gandal, on variety of complementary
  components with network effects.
• Farrell Saloner, Katz and Shapiro, Budd, Harris
  Vickers and Cabral Riordan on competitive
  dynamics and network effects.
• David Greenstein survey types of standard
  setting processes.
• Farrell on converters.

4
The Wireless Industry

• The EC has mandated a harmonized standard, GSM,
  for 2nd generation mobile services
• North America, and other countries, have allowed
  the market to determine standards
• In North America, and especially the US, there is
  coverage with multiple 2g standards
• Economic theory, and experience in other
  industries, suggest that mandated standards has
  some advantages and market standards has other
  advantages

5
Competing 2nd Generation Standards

• First wave of digital, second generation,
  wireless standards includes
• GSM Global Standard for Mobile Communication,
  based on a time division multiple access protocol
• CDMA Code Division Multiple Access or IS95
• TDMA/DAMPS Time Division Multiple Access or
  Digital AMPS, another standard based on a time
  division multiple access protocol

6
1G to 2G Migration in the US and EC

• The US mandated the analog AMPS standard for 1G
• In the EC, countries did not use a uniform
  approach, using both AMPS and NMTS and in
  different bands
• EC chose GSM for 2G
• US chose market based approach

7
2G in US

• In US the FCC
• Initially allocated two, 25 MHz, or 2x12.5 MHz,
  licenses for 1G AMPS networks
• Mandated the AMPS, analog, standard
• Subsequently, FCC allocated 120 MHz or 2x60 MHz
  for PCS
• First 60 MHz in 51 MTAs auctioned in 4Q 94,
  service began sometime later
• Subsequently, additional 60 MHz auctioned in a
  series of auctions beginning 95 in 493 BTAs
• Most recent auction was concluded in January 2001
• No PCS standard mandated, only out of band
  interference, service (had to be PCS) and modest
  build out requirements
• FCC allowed refarming of AMPS frequencies

8
2G in the EC

• The EU has delegated choice of wireless standards
  first to CEPT and then to ETSI
• GSM was selected in the 900 MHz band in 1987 as
  the harmonized standard
• GSM service was introduced in EC as early as 1989
  (in Germany)
• DCS1800, an upbanded version of GSM, was
  introduced in 1993
• EC had over 1M GSM subs by 1993
• By 1995 all EC countries had at least one GSM
  license in operation

9
2G Elsewhere

• A number of other countries have followed EC
  (e.g., Greece, Turkey, South Africa, most of
  Eastern Europe)
• Some countries allowed multiple standards
• Australia started with only GSM and has now
  allocated spectrum which is being used for CDMA
• Japan has PHS standard unique to Japan
• China and India have permitted allocated spectrum
  for both GSM and CDMA
• Israel has TDMA, GSM, and CDMA

10
The Competition

• Competition occurs at several levels
• Network infrastructure Lucent, Motorola,
  Nortel, Ericsson, Siemens, Alcatel.
• Terminals/handsets Motorola, Sony/Ericsson,
  Nokia, Samsung, Kyocera.
• Operator
• Chipsets Qualcomm, Nokia, TI, NTT
• IP Qualcomm, patent pool for GSM
• Network equipment and handsets are both spectrum
  and technology specific.

11
2G to 3G in EU

• Initial ETSI Special Mobile Group (SMG) planned a
  variant of 2G CDMA for 3G.
• New 3G CDMA standard would be backwards
  compatible with 2G CDMA.
• Backwards compatibility would benefit US chipset
  suppliers and also CDMA handset suppliers, which
  were largely non-European.
• European handset suppliers preferred
  non-compatible standard.

12
EU Spectrum Management Policy

• EU, and especially UK and Germany, were anxious
  to allocate 3G spectrum.
• Tipping effect of first to deploy a standard was
  thought to have an effect on subsequent global
  adoptions.
• EU designates CEPT/ETSI to set telecom standards.
• ETSI voting power weighted by European turnover
• SMG decided to make a few small adjustments basic
  3G CDMA standard
• SMG included Nokia, Siemens and Ericsson.
• New 3G standard, UMTS aka WCDMA was incompatible
  with basic 3G CDMA standard, renamed cdma2000
• US (QUALCOMM) complained
• ETSI standard setting policy explicitly favored
  EU suppliers over non-EU ones.
• ETSI standard setting process violated US/EU
  competition policy treaty.
• EU agreed to some modifications.

13
Band Plan Conflicts

• Equipment is specific to bands and technology.
• For 1G,
• AMPS was deployed 824 849 x 869 894 MHz.
• EU used both AMPS and NMTS bands at 450MHz
• For 2G
• US 1G 1850 1910 x 1930 1990 MHz
• EU 880 915 x 925 970 MHz 1710 1785 x
  1805 1880 MHz.
• For 3G
• US TBD 700 MHz AWS (1710 1755 x 2110
  2155 MHz)
• EU 1920 1980 x 2110 2170 MHz
• EU has not allowed re-farming, US has
• Other countries left to decide.
• GSM works in US, CDMA not available for EU bands,
  and has not been permitted in EU.

14
Spectrum for Broadband Voice and Data Services
15
2G and 3G Spectrum Over 1700 MHz
16
Coverage vs. Compatibility

• Theory is incomplete discusses network effects
  and compatibility
• Compatibility is of limited importance in
  wireless standards
• Matters to the extent that compatibility affects
  production scale, and therefore costs, of network
  infrastructure and terminals
• Reduces risk of orphans, but does not eliminate
  it, e.g., CT2
• Coverage determines value much more than
  compatibility

17
Mandated Standards vs. Market Determined Standards

• For Harmonization
• Costs, due uniformity
• Enhances coverage
• Reduced risk of orphan technology
• Reduced consumer uncertainty

• For Market Based Standards
• Competition
• Product/quality differential can enhance value
• Costs, due to competition
• No risk of locking into wrong standard

• Harmonization can lead to higher or lower
  penetration
• If harmonization improves end user welfare, it
  should result in higher penetration, other things
  equal

18
Dynamic Factors

• When the market, and not regulatory mandate,
  determines standards, early adoption decisions
  can have a tipping effect
• For wireless networks, interconnection means that
  compatibility is not essential
• Two or more standards can be viable, and tipping
  effect is less persistent
• When there are different firms deciding on
  standards in different regions, the choice in one
  region can affect optimal choice of standards by
  all firms in another region

19
Coordination Across Regions

• In each region, there are multiple licenses
  available
• With market based standards, different firms will
  make decisions in each region
• One firm will not usually want to adopt a
  standard that will not have coverage in other
  regions
• Multiple equilibrium can exist, depending on the
  sequencing of the decisions
• Equilibrium can exist in which all standards are
  in use in each region
• Equilibrium can also exist in which there is
  complete harmonization

20
A Simple Duopoly Model

• Technology starts at base level, 0, and can
  progress to new level 1.
• Two periods, and each has two stages.
• First stage firms determine whether or not they
  will produce to the same specifications.
• Second stage, firms invest in RD
• Probability of success ½ ?2
• Let ?S(j) each firms profit with a common
  technology j 0, 1.
• Let ?D(j,k) profit for a firm with technology j
  when its rival has technology k and they
  disagree.
• We assume
• ?S(j) gt ?D(j,j), j 0,1 and 2 ?S(1) gt ?D(0,1)
  ?D(1,0)
• At state (1,0) or (0,1), bargaining is costless
  and perfectly efficient, so that industry profits
  are the same as at (1,1).

21
Model Features

• If one firm gets new technology, it will earn an
  advantage.
• Firms cannot capture all benefits of investment.
• Can be under-incentives to invest if firms agree
  to one standard.

22
Incentives to Disagree

• Proposition
• If ?S(0) - ?D(0,0) is small , then
  standardization occurs in all states other than
  (0,0).
• In other words, firms have incentives to
  deviate from any single proposed standard.
• Result does not require differentiation or
  inefficient bargaining.
• Result should extend to dynamic models.

23
Data

• Data for 1994-9 from 25 countries, Australia,
  Austria, Belgium, Denmark, Finland, France,
  Germany, Greece, Hong Kong, Iceland, Ireland,
  Israel, Italy, Japan, Korea, Luxembourg,
  Netherlands, New Zealand, Norway, Portugal,
  Spain, Sweden, Switzerland, United Kingdom,
  United States.
•  Six countries had multiple standards, Australia,
  Hong Kong, Japan, Israel, New Zealand, and the
  USA
• Test to see if impact of multiple standards on
  penetration was positive or negative
• In most cases, multiple standards meant possibly
  higher overall market penetration

24
Variables

• Number of subscribers in each year
• Price is cost in US for 120 minutes of peak
  service
• Analog dummy is 1(0) if analog service was
  (un)available
• Multiple was 1(0) if multiple (one) digital
  standards were available
• Connect is the connection charge for residential
  service
• Payphone_100 is number of payphones available per
  100 people
• Also, Yn, n 1995,6,7,8,9, is a year n dummy,
  POP is population, GDP_capita is per capita gross
  domestic product

25
Summary Statistics
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Model 1
Dependent variable, subscribers/log subscribers
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Model 2 Results
Dependent Var. Log of Installed Base R2 .929,
Adj. R2 .923
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Model 3 Results
Dependent Var. penetration R2 .870, Adj. R2
.860
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Model 4 Results
Dependent Var. penetration R2 .718, Adj. R2
.655