Real options and technology management: Assessing technology migration options in wireless industry
Introduction
The US wireless industry is currently undergoing a major transition from second generation (2G) to third generation (3G) wireless technologies, which offer high speed data services. These high quality data services are the foundation of multimedia and interactive information systems that service providers hope will be a significant contributor to future profits. To that end, equipment providers have been developing the 3G technologies to support these services. For their part, the US wireless network operators must decide how to migrate their network, i.e., how to best deliver high-quality multimedia services at minimum cost over a smooth evolutionary path. Since the complete replacement of the existing wireless network architecture is generally not practical and since there is an economic trade-off involved in the choice of different technologies, the migration of the existing networks is challenging to network service providers: that is, which migration path to take and what to do once there.
The US wireless industry now has four nationwide wireless service providers: Cingular-AT&T Wireless, Verizon Wireless, Sprint PCS-Nextel, and T-Mobile. In addition, there are a number of large regional players, including Western Wireless Corp., US Cellular, Dobson Communications Corp., and Alltel. Each firm uses a different technology or combination of technologies for their current networks, as shown in Table 1. Verizon Wireless uses AMPS and CDMA; and Cingular-AT&T Wireless use AMPS, TDMA, and GSM. Sprint Wireless and T-Mobile use CDMA and GSM, respectively.
The evolutionary paths to 3G from the principal 2G technologies, GSM and CDMA are quite distinct and there are many alternative wireless network technologies, such as TDMA, GSM, GPRS, EDGE, WCDMA, cdma2000, etc. These abundant choices of wireless technologies require service providers to examine the options for their network evolution as a strategic decision. The main approach of this research, the real options approach (ROA), introduces a new perspective on technology policy issues in networks, such as network architecture and technology choice, network service provisioning, and network regulation and policy. Based on ROA, wireless network operators may find it worthwhile to evaluate new technologies as strategic options. This study intends to raise core issues concerning the transition to 3G and to resolve these both qualitatively and quantitatively.
This paper explores two typical network migration alternatives: the ‘global systems for mobile communications (GSM)-based’ network migration path and the ‘code division multiple access (CDMA)-based’ network migration path, as strategic options for facilitating the migration into a next generation network architecture. One calls for substantial infrastructure replacement (architectural innovation), while the other calls for upgrades to existing equipment towards 3G (modular innovation). In this study we blend a comparative study and a ‘what if’ study (or contingency study) by examining two wireless network migration scenarios. This paper also attempts to assess these migration path options towards the third generation (3G) wireless data service network architecture, using the real options approach (ROA).
Since one of the implicit aims of this study is to understand how the real options approach can be used as a model for technology choice, we simplify matters where possible. For example, taking into account all the problems of reaching relevant data on technological development, we assume that the only available data are on current market shares of competing technologies in generation. We hope to use more refined and enriched data in future research.
Section snippets
Real options theories: a brief overview
The field of real options has been recognized the fundamental importance in academics (McDonald and Siegel, 1986, Carr, 1988, Pindyck, 1989, Dixit and Pindyck, 1994, Trigeorgis, 1996, Amram and Kulatilaka, 1998, Benaroch and Kauffman, 2000, Benaroch, 2002, Kim and Sanders, 2002) and in actual practice (mining, oil, medicine, IT, etc.), as a strategic tool to evaluate business projects investment.
Network industry (Alleman and Noam, 1999, Economides, 1999, d’Halluin et al., 2002, Basili and
Technology options in wireless networks
Over the past decade, wireless networks have moved rapidly from first-generation (1G) analog, voice-only communications, to second generation (2G) digital, voice and data communications, and further to third generation (3G) wireless networks.
The 1G wireless networks (Rapport, 1996) are based on the analog technology which is usually represented as a series of sine waves to show the fluctuations of the voice itself. The main 1G technology standards are AMPS, TACS and NMT (Dahlman et al., 1998).
The model
In this section, we attempt to develop a theoretical framework to assess strategic options in the migration to the 3G wireless network architecture from 2G. The model is equivalent to options to exchange one risky asset for another in financial market (Margrabe, 1978) and is applied to assess technology options for migrating into the next generation network architecture and technologies in wireless industry. That is, we show the transition value when moving from generation-to-generation
Scenarios and data
Fig. 4 illustrates the overall design of this study to determine the best technology transition path. Two types of technology migration paths are identified: (1) Inter-Generational Technology Migration Path and (2) Intra-Generational Technology Migration Path. First, Inter-Generational Technology Migration Path deals with moving from one generation technology to another, for example, analog-to-TDMA, analog-to-GSM, and analog-to-CDMA. The other type, Intra-Generational Technology Migration Path,
Results and analysis
Before we get into specific scenario results, it is worth making a note on interpreting the graphs in the subsequent sections. They are based on market share data, which represent actual consumer behavior and are thus backward looking, rather than on expected market share, which are forward looking. Thus these graphs do not have strong predictive power, but, in line with the objectives of the paper, are intended to illustrate how real options can be applied.
Summary
In this paper, we investigated the historical evolution of wireless technologies from the first generation (1G) to the second generation (2G) and the third generation (3G) wireless network technologies. Based on the real options approach (ROA), we also developed a model to assess the transition (replacement) from old technology (premium value) to new technology (option value). Finally, we assessed the migration options of wireless network technologies in the US using our technology transition
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