AT&T Sees
Wireless Unit's
Growth Ebbing
----
By Stephanie N. Mehta
Staff Reporter of The Wall Street Journal
The Wall Street Journal via Dow Jones
AT&T Wireless Services, the nation's largest wireless phone operator, is
expecting a slowdown in growth as it shifts its focus to big-spending corporate
cellular phone users.
Faced with increasing competition from new wireless carriers such as Sprint
Corp.'s Sprint PCS unit and Nextel Communications Inc., the AT&T Corp. wireless
unit is turning its attention to the highly profitable business user. AT&T is
promoting aggressively its "wireless office" product for corporate campuses and
plans to move 20% of its work force into AT&T's larger business-services
division to boost wireless sales to companies. Last month, the carrier said it
is exploring plans to shed its lower-margin paging operation.
The strategy will come at a cost. In an interview, Daniel R. Hesse, chief
executive officer of the wireless unit, said the group "will pay a slight
penalty in subscriber and revenue growth for a short period of time as we become
more selective about the subscribers we bring on board."
Mr. Hesse said he expects the wireless unit to post 1997 revenue "north of $4
billion." In 1996 the unit reported revenue of $3.48 billion, up 19% from a year
earlier.
Analysts said AT&T will continue to be the dominant wireless player by virtue
of its size, marketing prowess and ability to bundle cellular service with
long-distance and other services. When the company bought McCaw Cellular
Communications Inc. for $11.5 billion in 1994, it acquired a national cellular
system with millions of existing customers. Today the carrier has some 7.8
million subscribers. But competitors said AT&T has been slow to build systems to
offer highfrequency digital service. By the end of the year, AT&T will offer
service at the 1,900 megahertz frequency in 10 markets. Sprint PCS said it
offers such service in 40 of the top 50 markets; PrimeCo Personal
Communications, a PCS carrier owned by two Baby Bells and AirTouch
Communications Inc., said it offers service in 20 markets; Nextel, which offers
a low-frequency digital service aimed at businesses, said it operates in 75
markets. AT&T will not say how many new markets it plans to enter in 1998.
At the same time, AT&T experienced quality problems with its low-frequency
digital service, offered in cities such as New York and Dallas. "It sounds like
you've got marbles in your mouth," one customer recently complained.
Mr. Hesse conceded that the carrier initially experienced sound-quality
problems and has moved to fix them. It nearly has completed a national upgrade
of service that will improve sound. One catch: The upgrade works only on phones
that have been shipped in the last several months with a special voice encoder
that improves sound quality. And AT&T said it hasn't decided on whether it will
allow its existing digital-service customers to get upgraded phones at a
discount.
But Mr. Hesse said he does not believe the carrier has moved slowly in
building out its digital markets. Besides the 10 high-frequency markets, AT&T
offers lower-frequency digital service in an additional 122 markets, giving the
carrier almost 1.5 million digital subscribers, Mr. Hesse said. "If you look at
our competitors, they're entering all these markets for the first time," Mr.
Hesse said. "We already have enormous market presence."
Other questions remain for the wireless unit. Mr. Hesse said the group
continues to test wireless local loop, a system for offering local telephone
service via antennas and receivers mounted on the sides of homes instead of
through traditional copper wires. The company is testing such a product with
employees in Chicago, and Mr. Hesse said AT&T plans other tests, including
possibly another neighborhood trial and a test on a college campus.
AT&T continues to be reticent about its plans to enter the $105 billion
local-phone market by using its wireless system to connect homes and businesses
directly to the AT&T long-distance network. Since the arrival of new chief
Michael Armstrong, AT&T is looking at a number of ways to invade the Baby Bells'
territories -- and using a wireless unit that can be placed on the side of
customers' premises is one option under consideration.
First AT&T will have to figure out how to deploy the system inexpensively.
Tests planned for the Chicago area next year should tell AT&T what its costs
would be using the network. Currently, "the wireless local loop business does
not appear to be justified by the capital expenditures to get into it," noted
John Bensche, a wireless analyst for Lehman Brothers.
Even as Mr. Hesse, a 20-year AT&T veteran, tries to further integrate wireless
services into the AT&T mainstream, the unit has displayed a little
entrepreneurial edginess. Last year, the wireless unit stunned many in the
industry by marketing its low-frequency digital wireless service as "digital
PCS," a term previously reserved for higher-frequency, 1,900-mhz service.
"It was quite a marketing coup" on AT&T's part to beat its rivals to market,
said Steven Yanis, a telecommunications analyst at BancAmerica Robertson
Stephens. "Many people don't know what PCS is, but they think it is better."
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