Strategic Options for Managing Technology Evolution in the Wireless Industry Hak-Ju Kim University of Houston – Clear Lake Martin Weiss University of Pittsburgh

2 Introduction Technology transitions are a way of life for wireless firms  Various technology adoption paths exist for firms migrate to 3G  How can we frame this decision using real options? The US is a good laboratory, since multiple technologies exist

3 Research Issues 1G 2G 3G At a given point in time, t, the number of 3G subscribers = (1) new to market + (2) migrated from 1G + (3) migrated from 2G T Assuming that (1) Firm A uses 1G + 2G (i.e., Cingular-AT&T, Verizon) (2) Firm B uses 2G (i.e., Sprint, T-Mobile, Nextel) (3) Firm C uses 3G (potential firms) t What is a firm’s migration strategy for 3G ? How to measure the value of technology migration? What is a firm’s migration strategy for 3G ? How to measure the value of technology migration?

4 Wireless Market

5 US Wireless Industry Verizon Cingular -AT&T Sprint PCS T-MobileNextel AMPSOO iDEN (integrated Digital Enhanced Network) TDMAO GSMOO CDMAOO

6 Technology Migration Options Cingular-AT&T Verizon

7 Research Design Old Technology (i.e.,1G or 2G) New Technology (i.e., 2G or 3G) Scenario I: Inter-Generational Technology Migration Old Technology (i.e., TDMA) Revolutionary change (i.e., CDMA) Scenario II: Intra-Generational Technology Migration Evolutionary change (i.e., GSM) Strategy: - Short-term Perspective: Single-step Technology Choice - Long-term Perspective: Multi-stage Technology Choice Strategy: - Short-term Perspective: Single-step Technology Choice - Long-term Perspective: Multi-stage Technology Choice

8 Technology Options and Scenarios Single-step Migration Scenarios  Inter-Generational Migration Analog => TDMA, Analog =>GSM, Analog => CDMA TDMA => cdma2000, TDMA => WCDMA GSM => cdma2000, GSM => WCDMA CDMA => cdma2000, CDMA => WCDMA  Intra-Generational Migration TDMA => GSM TDMA => CDMA GSM => CDMA Multi-stage Migration Scenarios  GSM-based Migration Analog => TDMA => GSM => WCDMA  CDMA-based Migration Analog => CDMA => cdma2000

9 Technology Assessment Option Model The value of the option should offset the premium Option ValuePremium (Opportunity Costs) Where, H(.) : option value B and P : market value of technology T : market uncertainty : stochastic function

10 Results (Inter-Generational) Desirable to migrate into new technology, but the timing is different for each technology Desirable to migrate into new technology, but the timing is different for each technology

11 Results (Intra-Generational)

12 Results (Intra-generational) US TDMA carriers should migrate to CDMA In reality some carriers choose the GSM migration path Result of sensitivity to data World data vs. US data

13 Results (towards 3G) Desirable to migrate toward 3G, but not now… Yet carriers are making investments today  Consequence of using market data

14 Summary Several migration paths are possible – no optimum path exists GSM (9.5Kbps) Analog TDMA CDMA (14.4Kbps) cdma2000 (2.4Mbps) WCDMA (2Mbps) (2003) (2004) (2004) (2003) (2003) (2010) (2010) (2010) (2010) (?)

15 Discussion Applied real options theory to mobile network transitions Model is very sensitive to data

16 Summary of the study Assessed technology migration option in the US wireless industry  Used the real options approach  Discussed the US wireless carriers’ technology migration strategies Used macro market data  Provided a reasonable data set for theory development  Better data would produce more useful results Techniques can be adapted for use elsewhere