Heard on the Street:
Bell Atlantic's Move May Spark a Price War
In Cell-Phone Service, Hurting Some Players
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By Susan Pulliam
Staff Reporter of The Wall Street Journal
The Wall Street Journal via Dow Jones
Take heart, cell-phone junkies: A price war may be about to break out on rates
for cellular-phone service.
That may come as welcome news for cell-phone users, but it could be bad news
for shares of big cellular-service providers, including the regional Bell
operating companies, AirTouch Communications and AT&T, which may be forced to
slash prices on their cellular service in response to a price cut unveiled
Monday by Bell Atlantic.
"This price cut is the first severe reaction by an incumbent cellular player
to new entrants" to the wireless market such as PCS, or personal communications
services, Salomon Smith Barney analyst Jack Grubman told clients in a note
Tuesday. "We believe other providers like the Bells and AT&T are likely to
follow suit, causing overall margin contraction industrywide," he added.
Bell Atlantic's announcement involved a 15% price cut on digital wireless
phone service, which is a new cellular technology that allows more phone calls
to be transmitted at a time than analog service, the older technology that is
provided to most cellular customers nationwide.
"This is important because people never thought Bell Atlantic would be
aggressive on pricing with wireless. But now they are pricing digital at a
discount to analog. And Bell Atlantic tends to lead the [Bells] in terms of
pricing," Thomas Lee, another Salomon Smith Barney analyst who is following the
developments, said in an interview.
Not only did Bell Atlantic say it will lower its per-minute charges by 15%,
but it also said it will offer unlimited mobile-to-mobile, or dispatch, services
for $10 a month. Wall Streeters say that move is aimed at snatching market share
from Nextel Communications, which has become a leader in the dispatch, fleet and
small-business corporate market.
"These markets have been Nextel's real engine for subscriber growth, and
Nextel has up to this point faced little competition from cellular," says Mr.
Lee.
Indeed, said Mr. Lee, Bell Atlantic's announcement could be especially
nettlesome for Nextel, because its monthly charges are $40 a month, four times
that of the new Bell Atlantic rates, says Mr. Lee. And, he says, "75% of their
revenue comes from the dispatch business."
Nextel's stock isn't reflecting any such risk just yet. Yesterday, its shares
closed at 28 13/16, up 1/4, despite a ho-hum fourth-quarter report. But Mr. Lee
says Nextel's shares could get hit. "People don't understand the implications
yet," he says.
Why would a big price cut be good for Bell Atlantic and not the other regional
Bell operating companies? The theory is that Bell Atlantic will not only pick up
market share from Nextel, but will also help to stimulate demand as customers
gravitate from analog service and start using their wireless phones more.
Some investors agree. "The concept of lowering per-minute costs will
dramatically enlarge the market," says mutual-fund manager Mario Gabelli. "The
name of the game is to get people to talk more," he says, adding that he
believes there may be short-term winners and losers in a price war.
"Ultimately," however, he contends, "the cellular business is a good one."
Other winners, according to some, are the PCS providers like Omnipoint and
Sprint PCS in New York, for instance. Why? Because Bell Atlantic's move is
basically a vote of confidence for digital service, which the PCS carriers
provide. "We see this as positive for two reasons for PCS providers," says Mr.
Lee in his note.
First, he says, it underlines the importance of digital wireless technology
because of its greater capacity and efficiency. Second, he adds, if many analog
customers begin switching to digital service, it will create an opportunity for
the PCS players to grab some of the defectors for themselves.
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Wireless Wars
Here's Wall Street's early line on likely winners and losers in a cell-phone
price war after Bell Atlantic cut rates by 15% on Monday:
WINNERS
-- Omnipoint
-- Sprint
-- PowerTel
-- Bell Atlantic
LOSERS
-- Airtouch
-- Nextel
-- Regional Bell operating cos. |
