A Nordic perspective on the world -
by Tero
thestreet.com
VoiceStream's (VSTR:Nasdaq - news - boards) anticipated move on Powertel
(PTEL:Nasdaq - news - boards) is a third step toward becoming a nationwide
operator of global systems for mobile communications, or GSM, in the U.S. Its
earlier purchases of Aerial and Omnipoint opened up the Eastern U.S. to
VoiceStream. Now Powertel plugs up a gap in the Southeastern U.S. The
importance of this chain of acquisitions is tied to the most important strategic
asset VoiceStream possesses: Among the national mobile-phone operators in
America, VoiceStream is the first to offer international roaming.
Unlike the other four contenders -- AT&T (AWE:NYSE - news - boards), Sprint
PCS (PCS:NYSE - news - boards), Verizon Communications (VZ:NYSE - news -
boards) and Nextel) (NXTL:Nasdaq - news - boards) -- VoiceStream was relatively
late to build a nationwide network, knitting together a national presence via a series
of acquisitions of regional mobile operators. This has left the nationwide network of
VoiceStream relatively patchy compared to Sprint or AT&T. The brand recognition
of VoiceStream is weaker than that of these two rivals -- or of Nextel. However,
VoiceStream possesses one crucial edge over the competition that may result in
both higher revenues per customer and faster profit growth.
Other U.S. mobile operators have been unable to tap the mobile roaming market,
which could grow into big business in coming years. The U.S. is a huge magnet for
both business and leisure travel from Europe and Asia. Much of the traffic comes
from countries where the market penetration of global systems for mobile
communications is already topping 40% -- Germany, England, France, Hong Kong,
Taiwan and Australia. Among people actually traveling to America, the GSM
penetration is comfortably above 70%.
Both the operators who use time division multiple access (TDMA) technology
(AT&T and the joint venture between BellSouth (BLS:NYSE - news - boards) and
SBC Communications (SBC:NYSE - news - boards) and the code division
multiple access (CDMA) operators (Sprint and Verizon) have been making noises
about so-called worldphones for more than a year. However, the cost of developing
those phones has so far turned out to be prohibitive. Every month that passes
without product introductions strengthens VoiceStream's stranglehold in the U.S.
on the international roaming market.
Nextel has announced a model that incorporates GSM technology and should
allow subscribers to roam in Europe and Asia. The trouble here is that nobody from
Europe and Asia is interested in purchasing a GSM phone with Nextel features,
since there is no awareness of Nextel in those markets. In contrast, there is
already a selection of a half-dozen GSM phones that look and feel just like ordinary
GSM models but offer the extra frequency necessary for U.S. roaming. The price
premium of these phones is not different from the premium other high-end models
carry; and there is no weight trade-off.
A Permanent Advantage?
How big is the potential of international roaming on VoiceStream? During its most
recent quarter, roaming revenues of VoiceStream exploded to $28 million from $1.8
million a year earlier. We are now at the very earliest stages of global roaming
market growth, so it is hard to gauge the potential size of the market.
However, two important developments are expanding the appeal of the concept.
VoiceStream has showed impressive roaming revenue growth during a period when
the cost of roaming has been very high -- new agreements among operators in
different continents are expected to slash the cost of a mobile call between the
U.S. and Europe by more than 50% within two years. If Deutsche Telekom's
(DT:NYSE ADR - news - boards) acquisition of VoiceStream goes through,
Deutsche Telekom is expected to attack the business market in both continents
aggressively with low-cost, heavily promoted U.S.-Europe roaming service.
Mark Cardwell, an analyst covering global telecommunications for Sanford C.
Bernstein, thinks it's likely that the Deutsche Telekom acquisition of Voicestream
will go through despite the current political controversy. "There is some concern
about whether the current management style of Voicestream might be disrupted by
the DT acquisition," he points out.
That international roaming in the U.S. has taken off before it has become affordable
or well advertised is an encouraging sign. Another issue here is the handsets. The
first generation of GSM models bundling frequencies used in both the U.S. and the
rest of the world were clunky, heavy monstrosities. The new generation has solved
the weight issues and now the smallest phones are about three ounces. Four out
of the top five handset vendors now offer attractive U.S.-Europe GSM models. Even
more importantly, the future high-end models of the key manufacturers will
incorporate the U.S. roaming mode as a standard feature offered by most, if not all,
high-end handsets.
The development of TDMA/GSM and CDMA/GSM hybrid phones has been stuck in
research labs even as GSM worldphones approach the third generation of product
development, which will incorporate Bluetooth and other new technologies. As
GSM worldphones reach higher production volumes, they keep raising the product
development hurdles for worldphones bundling other digital standards. Last year, a
certain major phone vendor promised a TDMA/GSM model for the first quarter of
2000. We are now in the third quarter and there are no new promises about specific
launch dates.
This will become a major problem for AT&T and Sprint if the international roaming in
the U.S. continues to grow at its current pace. The customers attracted by roaming
are the most desirable group of mobile subscribers -- business people and
consumers affluent enough to afford regular travel to other countries. Already,
VoiceStream's roaming revenue is more than 10% of its subscriber revenue. That
was before the Powertel acquisition and the new presence in markets with some of
the hottest tourist and convention attractions in America; Georgia and Florida. If
AT&T, Sprint and Verizon can't start offering international roaming services soon,
their current advantages of superior coverage and brand recognition may erode
more quickly than is now anticipated. The impact on overall subscriber base may
not be big. But among business customers, international roaming may turn into an
issue influencing purchasing decisions. |
