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Monday, May 2, 2005 - Page updated at 12:00 AM

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T-Mobile resists the rush

Seattle Times technology reporter

T-Mobile USA


History: Formerly VoiceStream before being acquired by German telecommunications giant Deutsche Telekom. Now traded under DT on the New York Stock Exchange.

Headquarters: Bellevue

Employees: 25,000, including 2,700 in the Puget Sound area.

Subscribers: 17.3 million. T-Mobile International has almost 70 million worldwide.

Market position: Currently No. 4 in the United States but would fall to No. 5 under Sprint PCS and Nextel Communications merger.

Products: Offers GSM-based cellular service and wireless Internet at more than 5,300 HotSpots in the United States.

By the time the ball dropped on 2004, it was clear the wireless industry had changed for good, and it was beginning to enter a new round of unyielding competition.

In October, Cingular Wireless completed its acquisition of AT&T Wireless. Two months later, Sprint PCS and Nextel Communications agreed to marry. Between the two deals, the number of U.S. carriers with a nationwide reach would narrow from six to four.

The consolidation comes as rivals fight less over price and calling plans and more over which carrier can build the speediest networks the fastest.

The race involves all the national carriers except one: T-Mobile USA.

When the new year started, the Bellevue company found itself the underdog of the industry. Practically overnight, it went from being a rising force with a strong focus on customer service and the youth market to being the smallest carrier nationwide with a cloudier future and no near-term plans to roll out the high-speed networks to handle advanced data services.

Its challenges were complicated by the fact that even if it wanted to roll out new services, it couldn't. New third-generation (3G) wireless networks require more spectrum, or wireless airwaves, and that's something T-Mobile doesn't have in abundance.

In light of the industry's quick transformation, what will T-Mobile do to stay competitive?

So far, the company appears content to remain where it is while the industry shifts into overdrive. Instead of embracing big-ticket promises, it remains focused on the same goal it has had for years: to provide some of the cheapest cellular minutes to a broad customer base and rely on its network of Wi-Fi hotspots to provide high-speed Internet access.

It plans to install a middle-ground wireless technology called EDGE by the end of this year and wants to upgrade its networks to 3G technology in 2007 or 2008, at least two years after competitors.

"We'll use the time to make a better product at a better price point," said Cole Brodman, T-Mobile USA's chief development officer. "Instead of jumping off the cliff with all the other lemmings with 3G and mowing everyone over, there's going to be very little put in the market that we couldn't do on our EDGE products, and hopefully better prices at similar performance."

But industry watchers say T-Mobile is susceptible to losing its niche, and it will need to keep up with rivals or fall behind.

"They can't tread water," said Richard Nespola, chief executive of TMNG, a tech-consulting company. "They are a niche player, which means they will have to continually reinvent themselves over time, or they will fade away."

Suzzana Ellyn, a senior analyst for wireless services at Current Analysis, characterizes the company as vulnerable. "I see T-Mobile services as stagnant. They really haven't done anything in the past year or so to address where the market is going."

Stalking the magic bullet

T-Mobile USA is a subsidiary of German giant Deutsche Telekom, which gained access to the U.S. market by purchasing VoiceStream Wireless of Bellevue in 2001 for $30 billion.

What little is known about the subsidiary's plans has come mostly from media coverage of Deutsche Telekom Chief Executive Kai-Uwe Ricke. In December, he ruled out a merger or acquisition and said instead that it would look for commercial partnerships for growth. Last week, at his company's shareholders meeting, he said selling T-Mobile USA, which had $11.7 billion in sales in 2004, was not part of the plan.

But as the smallest in a field of national giants, T-Mobile USA is at a disadvantage when it comes to buying equipment, getting exclusive handsets or signing partnerships.

It helps to leverage T-Mobile International's 70 million subscribers worldwide when it can. But with 17.3 million subscribers, T-Mobile USA is closer to big regional wireless carriers such as Alltel, which agreed to acquire Western Wireless of Bellevue in January.

That combination would result in more than 10 million customers when the merger closes. The largest carrier, Cingular Wireless, recently reported having 50.4 million subscribers.

Fueling the rush to high-speed networks is the need of wireless carriers to find revenue growth as the price of talk time drops and cellphone penetration in the United States reaches critical mass. For now, the industry thinks the magic bullet will come in data services: providing access to e-mail, the Internet, text messaging, ringtones, photo messaging and more advanced features.

Some of those services, such as TV and music downloads, work best on 3G networks.

High-speed caution

T-Mobile contends it is too early to roll out faster networks. Until there are enough applications and customer demand for them, its current 2G network is enough. In fact, the number of applications that depend on faster networks is low, and many are under development.

"What is it that they [customers] will be missing?" Brodman asked. "Today, you can get e-mail on devices, you can get instant messaging and you can get Internet access."

Verizon Wireless, which has launched high-speed, broadband networks in 31 markets, uses them for its V CAST service, which streams live TV to mobile phones. Carriers are also looking to 3G networks to offer full-track music downloads for phones.

But whether consumers will want to watch TV or download music while on the go is a matter of debate. The number of people signing up for what's available so far has been minimal. Does it make sense to spend millions on 3G networks?

"It's not about T-Mobile's lack of interest in next-generation technologies or that we don't believe the wireless networks will have to support more-advanced data capabilities," Brodman said. "At this point, there's not a compelling value proposition to put it in consumers' hands."

Mark Donovan, an analyst with Seattle's M:Metrics, a wireless-research company, said it's unclear what the right approach is. "I think you have to be very careful in this business in rushing out the next big thing," he said.

But it's also a chicken-and-egg question. "We haven't seen too many applications so far that demand high-speed networks," he said. "Then again, we haven't seen too many high-speed networks."

Brodman said it's likely the market could start to evolve by the middle of next year, when the price of handsets goes down. "We won't be too far behind that curve," he said. "It's always a risk, but I think we have ourselves covered ... ."

Wowing the cool crowd

In the meantime, T-Mobile may be a prime example of a carrier making do with the network its has.

It is selling slightly more data services than would be expected for its base. While its market share of subscribers hovers at about 10 percent, it grabs 15 percent of downloaded ringtones, 16.4 percent of downloaded graphics and 12.7 percent of games. It also has a larger chunk than would be expected of photo, text and instant messaging.

"When we look at what is being consumed today and what's available on the phone and networks, T-Mobile is doing better than expected, given their market share," Donovan said.

Some of that strength could be explained by its youth focus. T-Mobile has managed to draw the cool crowd by selling the Sidekick phone, which opens like a clamshell and features a full keyboard for fast typing. The device also is affordable and has been adopted by celebrities from Paris Hilton to Snoop Dogg.

Lagging on EDGE

If a T-Mobile customer wants to do more than send a text message or photos to a friend, the carrier offers an alternative service: its T-Mobile HotSpot, the Wi-Fi service in cafes and airports throughout the United States.

"We have the largest Wi-Fi network, with 5,000 HotSpots. That's true broadband access to the Internet," Brodman said. "Laptops aren't mobile devices, they are nomadic."

But that thinking could start looking dated as the industry evolves. Verizon Wireless has stopped selling Wi-Fi service to focus instead on rolling out higher-speed networks for phones and laptop cards.

"Our goal is complete mobility," said Georgia Taylor, a Bellevue spokeswoman for Verizon Wireless. "It's better, you can go anywhere with it, and that's what our customers are looking for."

Still, Wi-Fi could buy T-Mobile some time. The company offers a handheld device that allows customers to use its cellular network and Wi-Fi, allowing for speeds to increase considerably when connected to a HotSpot. It also is looking at introducing a technology that would allow subscribers to roam without interruption — between cell networks and Wi-Fi or other unlicensed wireless networks.

Meanwhile, EDGE can fill the gaps, Brodman said.

T-Mobile has fallen behind on its deployment of EDGE, considered a 2.5G technology. In 2002, the company said it would have it running in all its markets by the end of 2003. Today, it is deployed in California, and the company expects to complete its rollout by the end of the year. So far, it offers two phones for the service: models from Nokia and Motorola.

In comparison, AT&T Wireless rolled out the technology nationwide in late 2003. Cingular maintains the network and is working fast at getting its 3G network up.

EDGE's impact, on the other hand, has been relatively small in the United States. Donovan said 3.3 million of the 180 million or so handsets in the United States can use EDGE; virtually all are Cingular customers.

Brodman said the experiences of T-Mobile International and Deutsche Telekom drive his views on the new technology. He said 3G is widely installed in Europe, but its relatively high price has meant adoption by consumers is taking longer than expected. That's why he is so confident it is OK to wait.

Consumers may not be ready for 3G, but what will be the case three years from now?

"It's not a showstopper today, but if they don't start moving, it definitely will be when customers do start demanding it," said Michael King, an analyst at Gartner.

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com

Copyright © 2005 The Seattle Times Company

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