MOBILE WARFARE

By John Greenwald

The cell-phone industry needs an answering machine--not one that takes messages but one that gives answers. That would help Linda Vestal. Her head is buzzing as she browses among the wireless-telephone come-ons in a suburban Denver store. There, in bewildering profusion, gadgets and service plans from Sprint, Western Wireless and Motorola cry out for her attention. "There are so many phones and so many things that they do," sighs Vestal, a Denver park-district worker, who left the store with a fistful of brochures, but no phone, to ponder her choices at home.

If Vestal's options seem perplexing, it's because recent deregulation has created a free-for-all that is bringing real competition, not to mention utter confusion, to the burgeoning market for wireless phones (1996 sales: $25 billion). Like Denver, which was stuck for years with just two providers of cellular service (AT&T and AirTouch), cities across the U.S. are suddenly finding themselves with as many as half a dozen wireless-phone companies to choose from. That's good news for callers, who have heard the average price of a wireless minute fall from $1 a decade ago to 50[cents] today. Even better, the price is going to keep going down. But the battle has also brought breathless ad wars and numbingly complex price plans. "Many consumers are being overwhelmed," concedes Bruce Crair, a general manager for Sprint PCS in Southern California, one of the fiercest battlegrounds.

Giants such as Sprint (1996 revenues: $14.04 billion) and AT&T ($52.18 billion) are battling newcomers like Nextel ($332.9 million) and Omnipoint ($50 million) for control of the wireless market, which has been growing faster than the market for video recorders or fax machines did at a comparable stage of development. Only 10 million people used wireless phones a decade ago, when they were viewed mainly as toys for the rich or tools for executives and drug dealers. But falling prices and the ability to call from anywhere in an emergency--or to say you'll be home late for dinner--has made wireless telephony increasingly hard to resist. In suburban Chicago, soccer mom and part-time sales representative Kristin McLaughlin is delighted that her fifth-grade daughter can always check in after school. Says McLaughlin: "I love that Sarah can call up and say, 'Hi, Mom, where are you?'"

McLaughlin is among the nearly 30,000 subscribers who are signing up daily, boosting the number of wireless users to 43 million. That growth rate will raise industry revenue by $3 billion to $4 billion this year. Yet less than 20% of all U.S. households are wireless, making companies giddy about the future. "This industry is about to explode," says John Ledahl, an analyst for the Dataquest consulting firm in California's Silicon Valley. Adds Mark Lowenstein, vice president for wireless services at Boston's Yankee Group consultants: "If you are annoyed by long-distance companies interrupting you at dinner, get ready. Wireless companies are about to join the fray."

The driving force behind such forecasts is a new digital service called PCS (for personal communications system) that was created by the Federal Communications Commission. The agency took a piece of the airwaves in the mid-frequency spectrum that had been used for police calls and other public purposes and turned it over to industry for cell-phone service--at a price. The government collected $20.3 billion in granting PCS licenses for nearly 500 markets from New York City to Liberal, Kansas. Michael Elling, an analyst for Prudential Securities, estimates that PCS systems will create a 15-fold increase in wireless capacity within three to five years.

But PCS means more than the addition of new frequencies to the wireless spectrum. Unlike many older systems, which send a voice in a single stream as analog waves, PCS uses digital signals that break sound into discrete bits--the 1s and 0s that run computers. Digital technology enables PCS to offer such features as E-mail, caller ID and paging as well as compact-disc-quality sound and greater security from wireless eavesdroppers and phone-number thieves. (Digital technology is also becoming available in non-PCS formats.)

Yet today's PCS networks can't match the analog crowd as a provider of seamless coast-to-coast calling because the new services are still fragmented and operate on three different technical standards. And you have to buy the digital phones, which a company like AT&T sells in the New York City area for $79 to $149, including a small pager-like window that displays messages. Basic analog phones, on the other hand, are frequently offered for little or nothing as incentives to sign up.

While PCS is still an infant, with barely a 1% share of the wireless market, it sets the pace in pricing. In Washington, where PCS newcomer American Personal Communications took on the entrenched CellularOne and BellAtlantic Nynex last year, the average charge for wireless service has dropped from 45[cents] a minute to just 30[cents]. Contemplating the establishment of PCS systems across the country, Peter Nighswander of the Strategis Group, based in Washington, estimates that the number of subscribers will grow from about 350,000 today to 47 million by 2001.

So promising--or threatening--is PCS that behemoths from AT&T to the Baby Bells are furiously overlaying their analog systems with digital networks to compete with upstart carriers. That creates more confusion as companies like AT&T, the largest wireless outfit in the country with some 7 million subscribers, offer both digital and analog service along with the corresponding handsets.

How do you untangle this array of choices? First, by deciding what you want a wireless phone for and how often you will use it. For people who are likely to spend fewer than 100 minutes in over-the-air yakking, a basic plan with few bells and whistles should be adequate. And the choice between digital and analog? "For most people, analog works fine," says Ken Woo, a communications manager for AT&T. "It's pure telephone." But for business customers, who account for roughly half of all wireless usage, PCS services such as E-mail may look particularly appealing.

As for the winners of the wire-less race, most handicappers put their money on major carriers such as AT&T, Sprint and MCI, which are creating "national footprints" with digital and analog systems. They also have the money to survive a down-and-dirty price war.

Some newcomers are already faltering. Pocket Communications, a Washington company that bid $1.4 billion for 43 digital licenses last year, was in bankruptcy court last month after missing an interest payment to a major creditor.

Other companies are zeroing in on the rich business market. Nextel is wooing corporate customers by packaging radio, paging and telephone services into discount-priced bundles. Controlled by Craig McCaw, who sold his cellular business to AT&T in 1994 for $11.5 billion, Nextel aims to establish itself in regions covering 85% of the U.S. population.

The most ambitious players plan to combine wireless and land-line phones in a single service that will let customers make fixed and cellular calls from the same number. AT&T will test the first phase in Chicago this year. "Any technology that gives customers a choice is good for us," says Daniel Hesse, who became president of AT&T Wireless two weeks ago after Steven Hooper quit to join his old boss, Craig McCaw, at Nextel. The job hopping is one more sign of growing pains in an industry that has bedeviled its customers with too many confusing choices--even as it has begun to offer real competition for the first time.

--Reported by Stacy Perman/New York, Mark Shunen/Chicago and Richard Woodbury/Denver

With reporting by STACY PERMAN/NEW YORK, MARK SHUNEN/CHICAGO AND RICHARD WOODBURY/DENVER