Smart Talk The new generation of intelligent telephones
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(FORTUNE Magazine) – Whoever said "bigger is better" has never carried a cellular phone around--or even shopped for one lately. But the big news in cellular phones this year is not their decreasing size, or even their (generally) smaller price tags. It's about their smarts, thanks to the emergence of long-awaited digital wireless technologies.

While the digital realm seems to surround us, it's actually been slow to come to the world of cellular phones. A combination of market forces and government restrictions are to blame. Throughout the first decade or so of cellular's brief history, there's been more than enough capacity in the analog cellular system to handle subscriber demand, even though analog--which transmits your voice as a series of soundwaves--is not a very efficient way of using the limited radio frequencies set aside for wireless phones. But the number of cellular phone users in the U.S. has now surged past 43 million, and an average of nearly 30,000 more are signing up daily. Digital services--which send your voice as a series of ones and zeros--can greatly increase the capacity of cellular frequencies.

FRESH START

Meanwhile, the government has finally opened the airwaves to competition. Until recently, the Federal Communications Commission (FCC) allowed only two cellular service providers in most U.S. markets, and there was little incentive for these duopolies to lower prices or add new services. But the recent auctioning of radio spectrum space and the removal of restrictions by the FCC has sparked genuine competition. Many markets now have four or five companies offering wireless phone services, and most of the new players are starting fresh with digital technologies, either on traditional cellular frequencies or using so-called "personal communication service" (PCS) frequencies set aside by the FCC. To compete, the existing cellular carriers are converting their systems to support digital, too.

What's all this digital frenzy mean to you? Some confusion, to be sure, but also more choices, lower prices, better service, and a wide range of features beyond simple voice calls. Still, like everything else, digital phones and services have their pros and cons. And analog technology is not dead: Analog cell phones remain a viable option--in fact, they're still the only option in many smaller markets, though that will change soon.

Digital technology, at least in theory, offers several key advantages. The nature of digital transmissions should make them less vulnerable to the static or noise that affects analog cellular calls, and many cellular phone makers and service providers are pitching digital for its improved voice quality. Certainly, today's digital cell phones are much better than those of the early 1990s, which tended to sound tinny and flat and didn't match the quality of analog phones. The new digital cell phones sound much more like analog cell phones; whether they will offer superior quality remains to be seen.

Digital also promises to tame the problem of cellular fraud, and to ensure the privacy of cellular calls. Because digital calls, like computer files, can be encrypted, it's far less likely that your phone number can be swiped from the air or "cloned," or that someone can eavesdrop on your conversations. Over the long run, lowering fraud costs could even further reduce the price of digital service.

New digital wireless phone networks will simplify using your cellular phone outside your home area, too, and likely end the tyranny of widely varying "roaming" charges--those hefty per-day or per-minute premiums you pay for using your cell phone when you travel to other cities or states. Nextel, for example, is building a national digital network (it covers more than 275 cities to date) and inflicts no added roaming charges merely for using your cell phone in a different area. You pay the same as you would at home for local calls, and a flat rate of 15 cents per minute for long-distance calls. Competitors such as Ameritech, AT&T Digital PCS, BellSouth, GTE Wireless, PCS PrimeCo, and Sprint PCS are also building extensive digital networks.

The most immediate appeal of digital cell phones is that they can offer so many more service options. Nextel's phones, made by Motorola, combine a wireless phone, a pager, and a two-way radio. AT&T's Digital PCS service lets you receive messages on your phone sent via a special Website. And many new digital services are tossing in a host of familiar land-line telephone services as part of the deal. PCS PrimeCo includes voicemail and call waiting in all of its plans, and call forwarding is only an extra buck more per month. Sprint PCS includes caller ID, call waiting, and three-way calling with every service plan.

DIGITAL DECISIONS

What's not to like? For starters, your choice of phones may be limited. With some PCS plans, you're offered no choice at all--the phone is part of the package. With other digital cellular services you may be confined to a small group of phones because not all digital phones use the same transmitting technology. There are two competing transmission standards--code division multiple access (CDMA) and a rival scheme known as time division multiple access (TDMA). Most digital cellular or PCS carriers have opted for CDMA, but it's a good idea to check with the major carriers in your area before buying. You can hedge your bet with a dual-mode cell phone, capable of working with existing analog and new digital networks. That's especially helpful with many long-time carriers, whose cellular systems are still primarily analog but are in the process of being converted to digital.

Digital phone and service packages usually cost more up front than analog deals, too. You'll pay $100 to $400 for most of these digital phones. That's not an outrageous sum for a good cellular phone, but it's a far cry from the penny or dollar deals you can still get with many analog phones. Of course, analog phone deals require you to sign a service contract of a year or more; digital carriers typically ask for no such commitment. Monthly service deals vary widely, but for local calling, at least, digital phone service costs roughly the same as analog. The promise of digital phones that are as inexpensive to use as land-line phones isn't a reality yet.

More discouraging is the fact that you don't yet receive wide-ranging coverage. With an analog phone, you can call from nearly anywhere in the U.S., albeit with roaming charges (and sometimes PIN numbers for security purposes). Digital networks are still under construction, and coverage is spotty. Most larger metropolitan areas now have one or more digital networks with coverage extending into nearby suburbs. Digital networks are also beginning to blanket major roadways between cities. But beyond these fairly limited geographical areas there is typically little or no service, and it will likely be several more years before digital networks can compete with current analog networks in terms of overall coverage.

FASHION PHONES

Whether you choose analog or digital one trend is clear: The phones continue to get smaller even as they make bigger fashion statements. The smallest phones, like Motorola's StarTAC models, are wearable--you can clip them to your belt or strap them to your arm, and easily forget they're there. Fashion phones, a la Nokia's new 252 model, come in an eye-opening selection of colors and designs.

The next step is to transform the phone altogether. Nokia, for one, is merging a digital cell phone with the personal digital assistant, or PDA. Nokia's 9000 Communicator, introduced in Europe last year and now making its way into American markets, is a PCS cell phone that opens up to reveal a personal organizer with a miniature keyboard and screen inside with fax, E-mail, and even limited Web browsing capabilities, so you can surf the Internet from your all-purpose cell phone.

Whether or not such marriages last, digital technology is clearly here to stay. For now, analog is still your best buy if you care more about coverage than advanced features. But if you can live with regional or metro area coverage for the time being, and you're looking for a phone that can do more than simply send and receive voice calls, your mobile future is clearly in digital.