Tough calls
Wireless companies, slashing their rates to compete, can no longer count on explosive growth in their subscriber bases.
By Peter J. Howe, Globe Staff, 1/6/2003
Right around now was supposed to be the time the US wireless industry would be turning fat, happy, and rich.
With market penetration recently crossing the crucial 50 percent mark in Greater Boston and nation-
ally, cellphones are now in the hands of every other American. High-speed wireless data services were launched nationally over the last year by several carriers. Using cellphones to send instant messages
and digital photo-graphs has become a reality.
But as industry executives and analysts look to the new year, they see more hard slogging ahead, not an easy coast to big profits.
The price wars that have delighted consumers are squeezing wireless company profits. With per-minute calling rates dropping as rapidly as cellphone usage grows, the average monthly US wireless bill has fallen to about $51 from $65 five years ago.
Most carriers have seen their rate of customer growth slow in the last year. And they are having to spend steadily more, not less, for each new customer they add. ''Churn'' - subscribers jumping from carrier to carrier - costs them 2 or 3 percent of their customers every month.
Next November, a long-delayed federal policy allowing customers to switch carriers and keep their existing phone numbers is set to take effect. It could touch off a huge wave of defections among disgruntled customers, including lucrative corporate accounts, who may have stayed with an unsatisfactory carrier only to avoid the hassle of switching phone numbers.
Hard numbers won't be available until quarterly earnings reports are released late this month. But it already appears that the new wireless data services are a serious disappointment, if not an outright flop, for companies like AT&T Wireless, Sprint PCS, and Verizon, which have poured billions of dollars into upgrading their networks to match the Internet connection speeds of a dial-up modem.
Sprint PCS, which has been slashing prices for its ''PCS Vision'' data service that includes wireless photography, recently told analysts it expected to have only 15,000 customers for the heavily promoted service by the end of 2002. After launching one nationwide high-speed wireless data service, AT&T late last month scaled back a planned rollout of an even faster version from 15 cities to four.
And competition from so-called WiFi hotspots sprouting up by the thousands in coffee shops, hotels, and airports - soon to be supercharged by a new 20,000-location WiFi service backed by tech titans AT&T, IBM, and Intel - may undercut the cellular industry's whole costly push into wireless data just as their services hit the market.
''Clearly, in the US, it's going to be a tough time for the wireless carriers in 2003,'' said John Yunker, an analyst with Pyramid Research in Cambridge. ''It's a maturing market or even a mature market'' that Pyramid predicts will gain only 13 million new subscribers this year, down from 17 million in each of the last two years and 23 million in 2000.
Phil Marshall, a wireless analyst with the Yankee Group in Boston, said, ''It would look like a very healthy industry and one that should be very profitable, but we've got some pretty strong price wars taking place.''
Chris Foste, analyst for Technology Business Research in Hampton, N.H., said ''the industry is not adding customers very rapidly because of market saturation and lack of differentiation and compelling features.''
For nearly two decades, wireless carriers have been able to rely on explosive growth in subscribers and phone usage. But ''the next 20 percent of [market] penetration is going to be hard,'' said E.Y. Snowden, chief executive of Boston Communications Group Inc., a Woburn company that provides back-office software systems for prepaid wireless offerings from Cingular, Verizon, the Nextel-affiliated Boost Mobile, and others.
Across the industry, mounting competition and chronic customer churn is making it steadily more expensive for carriers to add new subscribers. At Nextel Communications, for example, the cost per net new subscriber jumped from $440 in the second quarter last year to $460 in the third. Sprint paid $395 per net new customer in the third quarter, up sharply from $285 in the same period a year earlier. T-Mobile's numbers jumped from $291 in the first quarter of 2002 to $322 in the third quarter.
One statistic illustrates the bind in which wireless companies find themselves: Nextel reported that it cost $383 million to provide voice and data services to its 10 million subscribers in the third quarter - but $412 million to market and sell the service in the first place.
A new Bear Stearns-Booz Allen & Hamilton study recently predicted that wireless data services are unlikely to exceed 10 percent of carrier revenues by 2007.
''Increased competition and reduced market power for carriers will most likely lead to margin erosion among corporate customers'' that are most likely to buy wireless data services for employees to connect to company networks, the report said.
For all the uncertainty the industry faces about its future profitability, the picture isn't uniformly bleak. Nextel, which has been on track to add more than 2 million subscribers during 2002, has seen its stock soar more than 150 percent from lows in July as its earnings and debt loads have improved sharply. Shares of AT&T Wireless, which Wall Street credits with a stronger balance sheet than most of its competitors, have bounced back 25 percent since the summer.
One bright spot identified by Morgan Stanley analysts is that, with most big network upgrades completed, capital spending as a percentage of sales should drop from 29.6 percent last year to 18.3 percent in 2004. Most carriers are expected to generate improving cash flow and profits in the coming year, if not as abundantly as once forecast.
And from the standpoint of investors, if not consumers, one of the most promising developments that could come in 2003 is the beginning of a wave of mergers that would reduce the industry from six big national players to four or even three. That could help staunch the kind of hyper-price competition that has ravaged the airline and long-distance phone sectors and thwarted wireless carriers from turning booming phone usage into sharply improved profits.
As of this month, the Federal Communications Commission lifted a cap on the amount of ''spectrum,'' or wireless channel licenses, that any carrier can own in a given market. That policy change would remove what has been a significant obstacle to widely speculated mergers by allowing the creation of super-sized carriers.
Because of the kinds of network operating systems they use, the most likely combinations have been seen as some union among AT&T, Cingular, and T-Mobile, or a Sprint PCS-Verizon marriage - which Sprint has said it is not interested in. Nextel remains an island technologically, using a Motorola-developed network system, but its industry-leading sales and popularity among high-end business users could make it an attractive takeover target nonetheless.
''Industry structure is still a problem, with too many competitors and too much pricing competition,'' said Merrill Lynch analyst Linda Mutschler.
Ron Dykes, chief financial officer of BellSouth, which owns Cingular in a 40-60 partnership with SBC, said anemic third-quarter results for Cingular ''reflect the hyper-competition in the industry. Would I like to have Cingular's performance better than it is? Of course, but there is a fanatical level of competition in the market.''
However, Foster, the Technology Business Research analyst, said he has recently concluded that ''the mega-merger scenario will be delayed until late 2003 at the earliest.''
The main factor Foster sees is that T-Mobile owner Deutsche Telekom has been backing away from its earlier push to find a buyer or merger partner for the Bellevue, Wash.-based carrier, which Foster said would be the most likely ''triggering event'' for industry consolidation.
''I think industry executives have run through all the potential scenarios and don't see how they can come out in a dominant position with the debt they will be forced to take on'' for an acquisition, Foster said.
Among other developments analysts and industry executives look for in the year ahead, Sprint PCS and Verizon are working on their own versions of Nextel's popular ''direct connect'' walkie-talkie feature, one of the few unique technology offerings among wireless carriers, and may launch them later this year. Current versions, however, require up to 8 seconds to set up the two-way connection, which could limit its popularity among business customers.
At the same time, Nextel is poised to expand its direct connect service regionally and nationally this year, so that two subscribers in, for example, Boston and Washington, D.C., or even Seattle could have a walkie-talkie-like conversation.
With color-screen phones now coming down in price to as little as $50 after rebates, Sprint's Larry McDonnell said his company is eyeing new wireless Web news services that would offer ''slide shows'' of multiple images illustrating story text, a first step toward downloadable five-second video clips that could come late this year.
''You're paying a fraction of what you used to pay for a color screen, and once you get it, you really realize what else you can do with your phone besides phone calls,'' McDonnell said.
Peter J. Howe can be reached at howe@globe.com.
This story ran on page C1 of the Boston Globe on 1/6/2003.
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