Wireless Stocks Await Arrival Of High-Speed Data Services
By ANDREA PETERSEN
Staff Reporter of THE WALL STREET JOURNAL
The prince charming expected to rescue wireless stocks seems to have a very slow steed.
Wireless data services -- the catch-all term for nonvoice services that run on higher-speed third generation networks -- were supposed to save the wireless carriers from being squeezed by increased competition, falling rates for airtime and fickle consumers who jump from service to service. Now it looks like it may take even longer for these services -- everything from surfing around the wireless Web at fast speeds to firing off e-mail messages to viewing streaming video -- to arrive. So don't expect those depressed U.S. wireless stocks to surge anytime soon.
Over the past six months, wireless stocks have been hammered, as investor enthusiasm has been squelched by technical glitches in the new networks, a skittish capital market that discourages the kind of rampant spending needed to upgrade to high-speed networks and a paucity of compelling services that people will actually pay for.
Now the news has gotten worse. High-speed data services suffered a very public humiliation last month when BT Wireless, a unit of British Telecommunications , attempted to demonstrate an early-stage third-generation network -- also known as 2.5G -- called GPRS, for General Packet Radio Switching, for local journalists. But BT couldn't get the phones, made by Motorola , to work. BT says the problem was that too many phones were given out, which overloaded the demo cell site. Motorola says there haven't been any problems with its handsets.
Japan's NTT DoCoMo , which was supposed to be the company to deploy the first commercially available third-generation service, just announced that it is postponing its launch to October, from May, because of technical problems with the software that enables base stations to connect to the handsets. And U.S. carriers are so spooked that they are talking about waiting and seeing how companies in Europe fare before plunging ahead with super-high-speed third-generation, or 3G, networks.
"We're a little concerned that next year we'll hit a plateau in" signing up new voice wireless customers, says Brian Hayward, a portfolio manager at Invesco Funds Group, which owns shares of wireless carriers Nextel Communications and VoiceStream Wireless . "The pickup in data that should offset the deceleration of growth in voice is not here yet, so we're in this valley period. Every bit of information we're getting shows that data is coming later, not sooner."
Mr. Hayward's firm sold some Nextel shares last year when he saw the first inklings that data revenue wasn't going to materialize soon. But he added shares recently when the price fell on a warning by Nextel of lower-than-expected subscriber additions. "The valuation was compelling," he says.
Since only 40% of Americans have cell-phone service, the voice business still has some room to grow before the competition gets really ugly and providers start slashing prices to poach each others' subscribers. Still, there is evidence that competition is squeezing the carriers. Churn rates -- the percentage of subscribers that leave the service -- have inched up this quarter at some carriers. Nextel, for example, said Tuesday that its churn rate for this year's first quarter was 2.5%, compared with 2% in the year-earlier quarter. And even the most bullish analysts agree that revenue growth industrywide is slowing. While revenue jumped 33% in 2000, Steven Yanis, a wireless analyst at Banc of America Securities, expects growth of 25% this year, 20% in 2002 and 15% in 2003.
U.S. carriers' reluctance to move full speed ahead to 3G can be traced to the woes of peers across the Atlantic. There, the carriers have spent a whopping $100 billion just for the spectrum needed to deploy 3G networks. Some now face debt problems, even as they struggle to figure out what expensive data services consumers will pay for.
"I'm in no hurry to do that," says Richard Lynch, the chief technical officer of Verizon Wireless, a joint venture of Verizon Communications and Vodafone Group , of plunging ahead with deployment of later-stage 3G. "The applications and the customer demand need to catch up with our capabilities. The jury is still out on that."
But none of the U.S. carriers, Verizon Wireless included, have said they are delaying upgrades to 2.5G capability, which will allow users to surf the wireless Web and use instant-messaging services, among other things, at faster speeds than now available. Entertainment applications, such as streaming video and animation-rich games, will need the more souped-up 3G networks. Sprint PCS , Cingular Wireless and VoiceStream Wireless all have said they will deploy the first stage of 2.5G later this year.
But that doesn't mean that subscribers will get high-speed services -- and carriers will get any revenue from them -- later this year. Only a few handset models are expected to be available to work on the 2.5G networks. Also, most carriers are planning to launch high-speed networks only in selected big cities or states. What this means for consumers is that they will get the higher speeds and 2.5G services only when they are in areas with an upgraded network. Outside those, they are stuck with the current pokey speeds. More annoyingly, they often won't be able to access the personalized information or services that they signed up for using the higher-speed networks.
"If carriers are only going to offer it in 20 markets, how are they going to explain that in their commercials?" asks Kevin Roe, an analyst at ABN Amro, whose firm has "buy" ratings on Sprint and AT&T Wireless Group . Mr. Roe cites Sprint for its powerful brand name, strong management team and the amount of spectrum it owns. Sprint uses a type of technology, which Mr. Roe says "will give them a near-term edge for 2.5G rollout." He says AT&T Wireless, which currently trades as a tracking stock, will be particularly attractive after AT&T proceeds with plans to make it a separate company, leaving the company free to make acquisitions or be bought by someone else.
Not only are the carriers going to have to wait longer for data revenue to boost their shares, the market is going to get more crowded. Verizon Wireless and Cingular Wireless, a joint venture of SBC Communications and BellSouth , are expected to launch initial public offerings sometime this year. "There's a lot of supply coming out," says Tom Kurey, a principal at Lincoln Capital Management, which holds Sprint PCS shares. "This could hurt the return of the wireless companies in the near term," although he thinks that Sprint shares "are extremely attractive" at current prices for long-term investors.
Investors and analysts hope that some anticipated consolidation will eventually buoy shares. There are six national wireless players, but some think there is only room for about four in the increasingly competitive environment. "If we go from six players to four this will be a wonderful industry," says Rob Gensler, portfolio manager for T. Rowe Price Media and Telecommunications Fund. |
