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Mobile phones: Hot new industry (Fortune Classics, 1984)

July 3, 2011, 4:43 PM UTC

Editors Note: Every Sunday, Fortune publishes a classic story from our archive. This one is a step back in time to August 1984, when we lived in a world where only the wealthiest among us could afford a mobile phone — and even then they were usually tethered to their automobiles. Even though the phones were $2,500 — or $4,000 for a truly portable one — analysts saw the promise of the budding wireless networks.

Buyers are rushing to get cellular phones in their cars at $2,500 each. Experts say the price is sure to go down — and demand way up.

By Colin Leinster

FORTUNE — The hottest new U.S. industry right now is cellular telephony — phones in cars. In early July cellular telephone systems were operating in eight major U.S. metropolitan areas, including New York, Los Angeles, Washington-Baltimore, and Chicago, and they are being switched on at the rate of one a week in other cities. By 1990 the handful of subscribers chatting away today on the expressways in those eight cities will have grown to nearly a million — even on the unlikely assumption that costs of subscribing will not have dropped from lofty introductory levels. But that scarcely measures the potential for a cellular explosion.

Cellular telephones will be available in most of the top 30 metropolitan areas in the U.S. by the end of the year. Another 60 markets should be hooked up in the ensuing decade. According to some estimates, cellular will be a $12-billion-a-year industry ten years from now-$4 billion in revenues from the calls that are made, $4 billion from sales of equipment to cellular telephone users, and $4 billion for antennas, computers, buildings, and other elements of the receiving and transmitting systems.

Worldwide expansion of cellular telephone systems could increase the industry’s girth manyfold. The Scandinavian countries and Japan have already hatched cellular systems, and their equipment manufacturers have leaped into the U.S. market. The investor eyeing this nascent industry is hardly confined to companies that seek to supply the service, which range from telephone company subsidiaries — Nynex, Ameritech, and their kin — to MCI, the Washington Post Co., and Western Union. Investors can also choose from an international menu of early starters among equipment suppliers. Oki Advanced Communications, the New Jersey based cellular subsidiary of Japan’s big Oki Telecom Group, vies with Motorola for first place among makers of cellular equipment. Sweden’s Ericsson recently scooped up a big contract for a Chicago system-an estimated $6 million. Other big players in the U.S. equipment market include AT&T, Tandy, and NEC.

The stocks of some manufacturing companies involved in cellular “went berserk” two years ago says John S. Bain, telecommunications analyst with Lehman Brothers Kuhn Loeb. Communications Systems Inc. of Dallas, which makes cellular equipment, saw its stock go from $14 to $40 a share; the price is now riding along at about $20 a share. Right now, Bain says, cellular “is a generally depressed marker.” The business takes huge investment and the payoff will take time. Lost of things could go wrong including threat that prices won’t drop fast enough to make a phone in the car as irresistible as it sounds. Another grim possibility is that cellular might prove so popular that emerging systems would be temporarily swamped, driving potential users away.

Right now only well-heeled, must-have-one individuals and those who can write it off can afford the hefty tab of cellular service. Equipment and installation cost about $2,500; that buys the handset in the car, plus the transmitter-receiver — known as a transceiver — and an antenna. Costs of the service vary from city to city. In Chicago, Ameritech Mobile Communications charges $22 per month as a basic fee for access to the system and 22 cents to 38 cents a minute, depending on the time of day. Long-distance tolls; of course, are extra. In Washington, Bell Atlantic Mobile Systems charges $25 a month plus 27 cents to 45 cents a minute.

Pressure on mobile equipment manufacturers to cut prices will be extreme as the first rush of cost-be-damned buyers subsides. The pressure will increase this fall when Tandy Corp., an adroit mass marketer of home electronic equipment through its nationwide chain of Radio Shack stores, comes out with its first cellular phones. John V. Roach, Tandy’s chairman and chief executive, believes that goods other than automobiles become mass-market items only when they cost under $1,000 each. Tandy’s first cellular products will cast “a couple of thousand,” Roach says. But he adds, “If what I think is going to happen in this market over the next 24 months does happen, half that price is possible.” That would get equipment costs very close to his magic mass-market price. Roach goes on: “In the course of the next two years I’d hope to see monthly costs drop to $25 to $30.” Such a decline should give demand a further healthy kick.

Advances in both equipment and service might also hoist consumer sales. Truly portable phones-models that could be toted around in purse or pocket for use on the hoof – might make cellular a rival of today’s wired telephone systems. The only walk around cellular phone now available, made by Motorola, costs more than $4,000. Its developer, Martin Cooper, head of Cellular Business Systems, a Chicago software company, believes portables will be available for as little as $1,000 within five years.

Many experts predict a hefty demand for additional over-the-telephone services. Mobile phones will be able to link up with computers to receive information on stock movements, inventory availability, sales orders, and other data. These services could be provided as hard copy, using printers or facsimile machines similar to those already used in various law enforcement vehicles.

Another possible cellular attraction: Oki is working on a burglar alarm that can be hooked up to a car phone. On parking a car, the driver records the location on tape and presets the number of the nearest precinct station. If somebody tries to break in, the car calls the cops. Oki expects to put the device on the market next year for about $500.

Cellular phone service will become available first in the top 90 markets, which contain about 74 percent of the U.S. population, but cellular may ultimately reach the potential customers who live and work in lesser markets, such as Battle Creek, Michigan. One scheme for spreading service into lightly settled rural areas and small towns and cities would link the cellular system with a direct broadcast satellite system instead of telephone lines. In King of Prussia, Pennsylvania, Roy E. Anderson, vice president and co-founder of Mobile Satellite Corp., a private company, says his company’s plan to link cellular by satellite will cost “a few hundred million.” But he has lined up several big investors, including Associated Communications and General Electric. He hopes to have the system working in 1988.

A cellular system works fairly simply: Each market area is divided into cells (hence the name cellular); a cell is an area that at present can measure up to 16 miles across, but can be divided. Someday, as demand builds, a cell may cover only a single office building. Each cell has an antenna — capable of picking up and transmitting 666 calls simultaneously. Cellular transmitters use low power and frequencies that don’t carry far, so channels can be used over and over.

As a car moves from one cell to another, computers linked with the transmitters transfer signals from one antenna to another as needed to keep them strong; the transfers take place unnoticeably, in fractions of seconds. By increasing the number of transmitters and reducing the size of cells, a cellular system could handle unlimited calls.

Mobile phones have been around for a couple of decades, but they’ve had a lot of disadvantages — mostly born of the limited number of radio channels assigned for this service. At the end of 1983 there were only 12 channels in New York City to be shared by 630 radiophone subscribers, with a waiting list of at least 2,000. Even the lucky 730 often had long waits for a free circuit during rush hours. And quality was poor; callers sometimes sounded as if they were at the bottom of a well.

Those not familiar with the slow pace of life at the federal Communications Commission might find it surprising that cellular technology is already a teenager. Bell Laboratories had developed a cellular system by 1971. After almost a decade of studies and hearings and regulatory wranglings, the FCC finally authorized two trials, one in Chicago, the other in the Washington-Baltimore market. After four years of trials, Chicago’s full-scale system started operating last October, Washington-Baltimore’s in December. The FCC is speeding ahead with approval of still more systems, with Dallas, Detroit, and Milwaukee about ready to join the cellular club.

In authorizing cellular systems, the FCC imposed several important restrictions. First, it decided that each market should be limited to only two carriers — the local telephone company, or so-called wire line company, being one. The other carrier was to be a “nonwire” company, so named because many of these would-be carriers have backgrounds in wireless two-way radio or paging systems.

In setting aside half o each market or the telephone companies, the FCC reasoned that they are in a good position to get the cellular systems operating quickly and reliably. Other applicants oppose the set-aside rule on the ground that it gives the telephone companies an unfair competitive advantage; several nonwire companies have appealed to the FCC to drop the rule — which the FCC so far has repeatedly refused to do.

Nonwire carriers are unhappy that the phone companies enjoy what amounts to a monopoly on all business, because all cellular calls wind up on their wires. Jerry Taylor, president of mighty MCl’s cellular subsidiary, which is applying for licenses in 12 of the top 30 markets, compares this to the monopoly AT&T (T) once enjoyed throughout the U.S. phone system. “It’s exactly the same thing,” he says. “The phone companies would like to make cellular systems subservient to their central offices.”

Taylor believes that cellular’s future lies with truly portable phones. “That means that when you fly from New York to Washington, you’ll be able to take your phone with you.” Taylor also believes that all cellular phones will be interconnected through a national network — “a universe unto itself’ where cellular phones would share a single area code. To increase competition, the FCC allows resale of cellular service. In New York, for example; where cellular currently is provided only by Nynex.

Mobile Communications, Western Union advertises its own cellular service. Western Union will install equipment made by its E.F. Johnson subsidiary in the customer’s car, provide a telephone number, and do the billing. Though the actual service comes through Nynex, Western Union pushes the quality of its equipment and service.

Rent-A-Car companies – Hertz, Avis, National, and Budget among others – are also resellers. They buy number from the phone company, install equipment in their cars, and hook up meters that tick away as calls are made – local calls only, thank you, except with telephone credit cars – and then charge customers a premium for the privilege of driving a car with a cellular phone as well as for calls actually made. In Indianapolis, Budget charges a premium of $7.50 a day, plus 50 cents a minute for use of the phone. Other resellers include GM’s Buick division and Ford’s Lincoln-Mercury division, both of which offer mobile phones as optional extras on some models.

The resellers’ rewards may be more than short term. LIN Cellular Communications, a subsidiary of New York’s LIN Broadcasting Corp., an independent TV and radio company, is waiting for FCC permission to provide cellular service in Los Angeles. In the meantime, it is whiling away the time as a reseller for Pactel Mobile Access, a subsidiary of Pacific Telesis, parent of the former Bell operating companies in California and Nevada. LIN Cellular President Richard Verne points out that his company’s contract with Pactel allows customers to take their phone numbers with them should they decide to switch from Pactel to LIN after LIN gets the nod to start service. That is an important concession. A customer who gets a mobile number is likely to print it on stationary and business cards. If the number can’t be transferred, the customer is all but handcuffed to the cellular supplier that assigned it.

The telephone companies got a head start in cellular by agreeing not to file competing applications to provide service in the top 30 markets. They agreed that AT&T’s seven operating companies would take 23 of these top markets and General Telephone & Electronics seven. No such amity ruled among nontelephone companies wanting to get into cellular, and they lost precious time scrapping with one another for markets. Only recently have such companies as Metromedia, Western Union, Millicom, and Maxell Telecom Plus – all prominent in the rush for cellular – got together in what they call “the grand alliance.” Under this alliance, encouraged by the FCC, only one partner will bid for a place in 55 of the next 60 cellular markets.

While the nonwire companies were still scrapping, the telephone companies rushed forth to snare what the industry calls “pent-ups” — customers so eager for mobile phones that they’ll pay almost any price to get them. In New York, for example, there were hundreds of them, many with phones installed weeks before the Nynex system was switched on in late June. When Nynex got approval, hundreds of early-bird customers began to line up. “This city’s a zoo,” exclaimed Bart Robins, manager of cellular installation at a Manhattan branch of Potamkin, a Cadillac and Toyota dealer. By the end of the first day after the switch-on, Robins was exasperated. “Everybody’s got to be first. Me. Me. Me.”

The carriers want to be first too. Nynex was subjected to a number of delays before it was allowed to switch on cellular service. When the FCC finally sent word to the company’s Pearl River, New York, headquarters, that it was okay to go ahead, one employee ran around the office shouting out the news “like Paul Revere,” recalls Morgan J. Kennedy, Nynex Mobile’s president. Then everybody went out and drank champagne.

Cellular One, a nonwire system, got a brief head start in the Washington-Baltimore market, where it competes with Bell Atlantic Mobile Systems, a subsidiary of Bell Atlantic. Wayne Schelle, chairman of Cellular One, figures being the early bird is worth “about two percentage points of market share a month.” This calculation, he says, led to the formation of Cellular One, the first significant joint venture among competing nonwires.

When Schelle bid for the Washington license in 1982, the company he headed was named American Radio Telephone Service. ARTS, originally a beeper company, had operated a trial cellular service for four years. There were four other contenders: the Washington Post Co.; Metromedia; Metrocall, another paging company; and Metropolitan Radio Telephone System, a cellular consulting firm.

ARTS and the Post’s cellular business merged, which cut the number of competitors by one. “We thought that the joint venture gave us a good combination, our experience and their big league size and commitment to communications,” says Schelle. But the FCC was moving slowly, ponderously mulling the applications of the three contenders. “I began to worry that the advantage we had, the four-year trial period, would be lost to a head start by Bell Atlantic.”

So he began to think of some kind of further merger. In September, he sold the ARTS-Washington Post partnership to Metromedia for cash and part of the business. Cellular One was formed and won approval as the nonwire operator in the Washington Baltimore market. The company’s system began operating in December, four months ahead of Bell Atlantic. A marketing battle has ensued, but Schelle claims that the head start he gained has indeed paid off — Cellular One has 3,000 subscribers to an estimated 600 for Bell Atlantic.

Manufacturers of cellular equipment also face a competitive struggle. Competition will be especially tough because there is little to differentiate products. Salesmanship makes the difference. Motorola, the dean of mobile telephony, lost a piece of business in its own backyard when Ericson snatched the contract to build a switching station for Rogers Radiocall, a metromedia subsidiary and Ameritech’s Chicago competitor.

Oki sees itself as outstripping Motorola in the U.S. market. “We’re No. 1,” insists Mal Gurian, chairman and chief executive of Oki’s U.S. operations. “We have more than a 50% market share.” Motorola disputes the claim. But Oki is doing very well. The company has an exclusive agreement to provide New York’s Nynex system with equipment, and another to provide 99% of Southwestern Bell’s. It also has nonexclusive contracts with Bell Atlantic and Pactel. In fact, Oki’s quick success nearly swamped it, and for a while the company was unable to keep pace with demand for its products. Now, Gurian says, Oki’s first U.S. facility, a robot filled factory in Norcross, Georgia, is in full production.

In, fact, Oki may be supplying more customers than it wants to. A black market already seems to be flourishing in mobile phones. Gurian says he keeps seeing and hearing advertisements for Oki equipment “place by people we’ve never heard of.” The ads have shown up, he says, in New York, Miami, and Los Angeles. He adds: “It’s driving me crazy trying to find out where they’re getting the equipment.” A product that spawns the black market clearly has good prospects.