The Decline of Pager Technology Dave Donnelly Greg Park Ludwig Reimmer Grace Wood
Although the first pager-like system was used as early as 1921 by the Detroit Police Department, paging was invented in 1956 by Multitone Electronics for use at the St. Thomas Hospital in London to alert doctors attending emergencies. 1 It wasn t until 1959 that the device was coined a pager by Motorola. Pagers are sometimes referred to as beepers as the device either vibrated or sent a series or quick beeps to alert a user of a pending message. Pagers are a subscription service whereas the customer pays to receive a unique number for their pager. When someone calls the assigned number, they are directed to a recorded greeting which instructs them to leave a voicemail or numeric message. Usually, within a few minutes the paged person will receive an alert beep from the pager with the phone number to return the call. Types of pagers: 1. On-Site paging systems are normally used in hospitals and allow urgent information to be conveyed over radio waves within the building. More recently, this system has been used in the hospitality industry to alert customers/clients when services are available. For example, restaurants use them to alert customers when their table reservation is ready. 2. Wide area paging systems are similar to the on-site system but allow messages to be conveyed over satellite radio waves across a city, state, region or country as opposed to a single building 3. One-way pagers can only receive messages 4. Two-way pagers allows users to receive and send messages a. Numeric pagers allow users to send numeric messages usually consisting of a series of digits that make up a return phone number or numeric pager code. For example 911 = emergency 1 Wikipedia - http://en.wikipedia.org/wiki/pager
b. Alphanumeric allows a user to send a string of numeric and/or text messages. Alpha numeric pagers are often assigned a unique email address which usually contains the pager number The pager s humble beginning as a communications device for medical staff and emergency responders saw tremendous expansion in the 90 s and was adapted commercially by the consumer market only to retract in 2001 primarily due to the introduction of the affordable and functional cell phone. Today the pager is used by the niche market that first embraced it: medical staff, emergency responders and information technology support staff due to its ability to send very quick and reliable messages in critical times such as emergencies and disasters. Hospitals in particular continue to use pagers as cellular coverage can often be weak in large medical complexes and radio transmitters can often interfere with sensitive medical equipment. Hearing impaired people who have no use for mobile voice services often use two-way pagers as their mobile communication device of choice. For most of the history of pagers, Motorola was the dominant leader, gaining as much as 85% market share in 1942. Motorola first introduced the term pager in 1959, introduced the first successful consumer pager, the Pagebody, in 1974, and for more than 40 years, the company was at the forefront of both the one-way numeric pager and two-way numeric pager markets. In the early 1990s, the paging industry demonstrated phenomenal growth. During this period, nine companies underwent IPOs, raising over $425 million. By 1996, pager service providers were considering network upgrades, hardware enhancements, and effective methods for ensuring widespread adoption by millions of new customers. Industry analysts were predicting that the number of pager users in America would top 50 million, or one fifth of the country s population.3 Hardware manufacturers like Motorola were partnering with the world s largest pager service providers to bring 2 The Boston Globe, At your beep and call; Falling prices cited in popularity of pagers, May 6, 1994. 3 Scheier, Rachel. The Christian Science Monitor: More People Using Pagers Create Beeper Traffic Jam One-fifth of all Americans could own a pager by 2000, Sept. 29, 1994.
customers the latest features in pager communication. The customer base for pagers had grown rapidly from medical and emergency personnel to parents and teens around the world. (See Exhibit A for an example of Pager Speak A numerical communication code, which became widely popular among teenaged pager users in the 1990s). Exhibit A: Pager Speak (Pop culture 1990s) Numerical Communication Code Numerical Code Interpretation 911 Call urgently 811 It s not so urgent 143 I love you 121 I need a personal chat 007 I have a secret 411 What s going on? 45 56 Good night, sweet dreams Source: The pager rings off, bbc.co.uk Pagers had become a status symbol for some, and a new high tech toy for others. More importantly, it was far cheaper than any other mobile communication method, making the technology accessible to customers of all income levels. As adoption grew, so too did the customer s appetite for new features and capabilities. Pager service providers competed fiercely for customers, focusing on network capabilities and the portfolio of pager hardware offerings as the main levers of competition. Growing in parallel to pager technology in 1998 was the world wide cellular telephone network. Still cost prohibitive for most of even the developed world, pager service providers and manufacturers were making efforts to stem the future threat. In an attempt to provide cutting edge features to pager customers, Motorola and several service providers began offering two-way paging capability, as well as alphanumeric paging. These new
features allowed pager users to both receive and send numeric and text messages from their pagers. The new offering was part of a move by service providers to further stimulate growth and defend against advances in cellular telephony technology. 4 This defensive maneuver would present most pager service providers with a difficult decision surrounding the required network upgrade to support the new technology. Hardware manufacturers, like Motorola, were in a far less perilous position. Most early pagers relied on radio waves to receive messages. Pager service providers were able to cheaply access AM/FM radio waves to service their customers. The new two-way offering would require a network upgrade of $400 million. 5 For pager service providers that decided to move ahead with the build out, they would be left with a fundamentally different cost structure. Two-way pagers were introduced to the market at an average retail price of $350, not including the subscription fee. 6 Following the emergence of what seemed to be an increasingly reliable cellular network in the US, as well as more affordable cell phones with increased features comparable to those offered by pagers, pager service providers were left with little to no room to charge higher prices to customers. Despite their efforts to retain customers, pager service providers witnessed a mass exodus for customer in 2001 from pagers to cellular telephones. Although more expensive, the cell phone s utility to customers was far greater than the pager. Since monthly pager service fees were so low, switching was relatively cheap. Aiding the switch further was the offering of hardware rebates by cell phone service providers. These rebates allowed customers to commit to long term service plans and receive generous rebates on the actual cell phone, leaving the customer with a slightly higher monthly bill when compared to pagers, and a manageable upfront cost. Once of great interest and popularity to the mass market, the pager was again relegated to a niche industry for a specialized customer base. 4 McKay, Martha. Knight Ridder Tribune Business News: Pager Industry in Crisis as Customers Turn to Cellular Phones, Apr 23, 2001. 5 McKay. 6 McKay.
Motorola s ability to ride the wave of the pager market, and seamlessly switch to the cell phone market exemplified the success of many other hardware manufacturers during the period. On December 4, 2001 Motorola announced its retreat from the pager market. On the day of the announcement shares rose approximately 3% as investors welcomed the news. Motorola had placed multiple bets in the wireless communications market, and due to the timing of the pager boom and subsequent cell phone boom, was able to collect on both with minimal losses. While working with pager service providers to upgrade service options and capabilities, Motorola was simultaneously developing cell phone technology to capitalize on the impending decline in pager popularity. After Motorola s exit from the pager market, a number of smaller firms began to enter the market 7, Exhibit B indicates Pager Operators in the U.S. in 2001. Most of the service providers provided both one-way and two-way paging. Exhibit B Pager Operators One-way pagers Two-way pagers Other 33% Arch Wireless 30% Metrocall 19% Skytel 4% Verizon Wireless 10% WebLink 4% Motient 9% Cingular 13% Other 21% Arch Wireless 11% Metrocal l 6% Skytel 19% Verizon 2% WebLink 19% Source: Planning Assumption, Market Overview: US Pagers, November 6, 2001 7 Newsbytes, Pager Market Up, Motorola Market Share Down, August 11, 1997.
Yet, as competition in the pager market intensified and the industry faced considerable consolation and restructuring, many providers filed for bankruptcy protection as a result of the high debt the providers incurred to build expensive national networks, reduced ARPUs as a result of cutthroat price competition, and the increased adoption of the cell phone and other substitutes for wireless communication 8. Exhibit B indicates a list of bankruptcy filings among pager operators. Exhibit B Bankruptcy Filings among Pager Operators Operator WebLink Industry Consolidation Filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (05/2001) Acquired by Metrocall Holdings, Inc. (11/19/2003) Metrocall Acquired by Arch Wireless Inc. (11/16/2004) Arch Wireless USA Mobility, Inc. formed to effect the merger of Arch Wireless, Inc. and Metrocall Holdings, Inc. (11/16/2004) Focus on emergency messaging Skytel Formerly a subsidiary of MCI WorldCom, Inc. As of February 1, 2007, SkyTel Corp. formerly operated as a subsidiary of Bell Industries Inc.(02/01/2007) Operates as a subsidiary of Velocita Wireless L.P. (06/13/2008) Source: CapitalIQ Database accessed October 10, 2008. Pagers Today There has been a rapid decline in pager subscriptions over the past 10 years. This decline is the result of improved technology and infrastructure to promote the penetration of mobile phones. Towards the turn of the century, the reliability of mobile phone service improved, thanks to investment 8 The Washington Post, Pager Firms Is Latest To Pull The Plug, December 7, 2000.
in additional cell phone towers needed to help transmit mobile phone signals, and thanks to the increased functionality of mobile phones in the form of new features on handsets that allow users to play games, surf the internet and send text messages. The text messaging capability on mobile phones and the increased reliability of mobile phone service throughout the U.S. accelerated the adoption of mobile phones as a substitute for pagers, particularly among nonprofessional users. The Americanteenaged culture that popularized pagers in the 1990s turned its attention towards text messaging as the mobile-text communication of choice, helping to drive pagers into pop culture extinction. Despite being replaced by mobile phones as the communication device of choice in the wireless communications market, pagers are still the communication devices of choice in hospitals in government for two distinct reasons: 1. Hospitals/healthcare Pager networks are more reliable than cellular networks. Thus, emergency personnel rely on pagers to communicate to help ensure successful communication of a message. In addition, the radio transmitters in phones tend to interfere with sensitive hospital equipment, while pagers do not. 2. Government Pagers are still used in the government market among agencies that respond to national disasters and provide emergency medical response. Pager networks are typically not prone to network overload as cell phone networks are, and they also have stronger signals, which will allow for critical messages to transmit. The existence of this niche market has allowed pagers to coexist alongside mobile phones and handsets. Yet the marketplace for pagers remains a challenging one for pager subscriber companies. USA Mobility, one of the largest paging network operators in the United States, has seen its one-way paging subscribers fall from 4.4 million in 2005 to just under 3.2 million in 2007. As such, USA Mobility has decided to focus on the rationalization of its paging network to decrease operating costs and take advantage of the lower capital expenses needed to support the more mature paging networks, and
thereby, help drive free cash flow. Although USA Mobility has been able to generate free cash flows thanks to lower operating expenses and capital expenditures, the company s stock price reflects investor concerns about the ability for this leader in pager networks to generate enough of a return from paging revenues to satisfy investors, (see Exhibit B, USA Mobility s stock returns since November 2004 IPO 9 ). Exhibit B USA Mobility s Stock Returns since November 2004 IPO In addition, the Federal Communications Commission issued a Back-Up Power Order, which requires all mobile radio service providers to have at least eight hours of back up power at each transmission site to help minimize communication outages in an emergency. The order, which is scheduled to go into effect in 2009, would increase operating costs for pager network operators, should it go into effect. USA Mobility is appealing the order. Despite the challenges which exist for pager network operators, pagers continue to exist amidst a market with sophisticated handsets including the popular BlackBerrys and ipods. Until cellular networks are able to provide the reliability of message transmission that pager networks can offer, pagers will continue to coexist among the most sophisticated of mobile phones and handset devices. 9 Note, in 2004, USA Mobility formed to effect the merger of Arch Wireless, Inc. and Metrocall Holdings, Inc.