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VoiceStream in the Crosshairs?
As the wireless industry starts to consolidate, analysts consider one company the most likely to get snapped up early.
By Matthew Maier, May 21, 2002
The wireless sector -- once the bright spot of the telecom industry, considered a sure bet to deliver years of meteoric growth -- is facing its first real slowdown. Handset sales are slumping, new customers are scarce, and debt-laden carriers are scrambling to cut costs and turn the growth back on. Because of the steeper competition, many analysts think a round of consolidation is probably looming.
Enter VoiceStream, a subsidiary of Germany's Deutsche Telecom (DT). As the smallest of the six U.S. carriers, with just 7.5 million customers, VoiceStream is the most frequently mentioned candidate whenever there's talk of industry consolidation. According to recent reports, the company, which is based in Bellevue, Wash., has even hired Goldman Sachs to advise it on strategic options, including a possible merger with Cingular Wireless or AT&T Wireless (AWE).
For VoiceStream, AT&T Wireless is an option; a deal with Cingular would make the most sense, however. All three use the same wireless standard: global system for mobile communications (GSM), which was first adopted in Europe and Asia. But VoiceStream and Cingular already operate a joint venture that gives Cingular customers service in New York City and will soon give VoiceStream customers service in California and Nevada.
Many analysts see a merger of some sort as inevitable. "I don't think we need three national carriers building out separate networks across the country, especially when they plan to use the same kind of technology," says Jonathan Atkin, an analyst at investment firm Dain Rauscher Wessels.
In addition to compatible technology, VoiceStream has other assets that make it an attractive merger target. Like Sprint (PCS), VoiceStream has been a pioneer in integrating its next-generation networks with 802.11b hotspots. Also known as Wi-Fi, 802.11b technology offers faster connections to the Internet. As a result of its purchase of MobileStar Networks earlier this year, VoiceStream now operates more than 600 of these short-range nodes in Starbucks (SBUX) coffee shops and airports around the country. The beauty of combining GSM technology with Wi-Fi is that VoiceStream phones will eventually switch back and forth between the two seamlessly, depending on the customer's location.
Finally, VoiceStream also managed to add 500,000 new customers in its most recent quarter, despite an industrywide slowdown in subscriber growth. (Some of the new customers were no doubt persuaded by VoiceStream's monthly rates -- the lowest in the industry.)
Yet even with all the positives, VoiceStream faces many of the same financial pressures confronting other players in the wireless sector. Although it earned revenues of more than $1.2 billion in the first quarter of this year, a 7 percent increase over the last quarter of 2001, VoiceStream saw its average revenue per user (ARPU) -- a key metric in achieving profitability -- dip slightly, from $52 to $51. The company also posted a $3.8 billion loss as a result of spectrum license costs.
So what does the future hold? Deutsche Telecom purchased VoiceStream for $30 billion last year, hoping to become a player in the then-promising U.S. wireless market. Since that time, demand for new phones has evaporated and internecine price competition has strained all six domestic operators. If VoiceStream ends up on the block, it's unlikely that Deutsche Telecom will be able to get $30 billion for it.
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