To all...
Leibowitz, Bensche and Freedman bullish
on wireless
By Elizabeth V. Mooney
NEW YORK—Taking the pulse of the domestic cellular and personal
communications services sectors as 1998 drew to a close, securities
analysts from three major investment banks offered a positive prognosis
for 1999 and beyond.
When the full-year count is completed, Donaldson, Lufkin & Jenrette
Corp. is projecting the overall number of subscribers will total 69 million,
a 25.6-percent increase from the prior year. A rising growth rate on a
rising base will continue with unabated acceleration for the next 10 years,
reaching 63.4 percent at the end of 2008, when there will be 183 million
wireless customers.
‘‘Once again, we recently were forced to revise our forecast upward,''
Dennis Leibowitz, director of media/communications research for DLJ,
said Dec. 17 at the Wireless Industry Finance '98 conference, sponsored
by International Business Communications, Southborough, Mass.
‘‘Look for wireless penetration to triple from 21 percent last year (1997)
to 63.4 percent by 2008 as wireless approaches landline penetration
rates.''
Inadequate signal strength is the primary impediment to wireless' goal of
becoming a landline telephony replacement, said John M. Bensche, senior
wireless services analyst for Lehman Brothers Inc.
‘‘You need five bars of signal strength for wireless to become a landline
replacement, and this creates an interesting play for tower companies
building out (network) infrastructure,'' he said.
Prognostications of landline replacement by wireless telecommunications
in the United States often are based on the European experience, where
incremental penetration rates are higher. However, there are at least three
major differences between here and there that should temper any foregone
conclusions, said David A. Freedman, telecommunications services
analyst for Bear, Stearns & Co. Inc.
A single standard, Global System for Mobile communications, dominates
the European continent, whereas the United States has a polyglot of
radio-frequency technologies.
‘‘European landline service is measured, expensive and of poor quality, so
it makes (wireless) substitution easy,'' Freedman added.
Furthermore, prepaid calling, which is a key growth driver, takes
advantage of a cultural phenomenon, the commonplace usage of debit
cards. In some countries, the tax code also provides an incentive,
exempting prepaid services from taxes imposed on telecommunications
subscriptions.
According to DLJ projections, personal communications services are
gaining ground on cellular telecommunications. Cellular subscribers
accounted for 59.5 million, or 86.2 percent, of the 1998 total and 58
percent of the new customer additions. By the end of 2008, PCS
subscribers will total 84.45 million, representing a 46.1-percent share of
the total market and 70 percent of all new customer additions, said DLJ.
By then, when DLJ projects an overall 63-percent penetration by wireless
services in this country, cellular subscribers will account for 34 percentage
points and PCS subscribers for 29 percentage points (of the 63 percent).
‘‘Of the 29 percent on the PCS side, 80 percent will belong to A (block)
and B (block) carriers and 20 percent to Nextel (Communications Inc.),''
Leibowitz said.
‘‘It will be hard for one additional PCS player to get cash flow, and that
answers the question of (the need for) additional licenses.''
Consequently, Leibowitz said he believes the potential exists for more
mergers and acquisitions of wireless carriers.
‘‘Omnipoint (Communications Inc.) has publicly stated it is looking for a
strategic partner and may sell out altogether,'' he said.
‘‘As for the other independent GSM carriers, the question is whether they
can put together a national footprint and (their version of) a Digital One
Rate plan or will they consolidate into a handful of companies that will
bundle with landline service?''
The AT&T Wireless Services Inc. Digital One Rate plan, which some
other carriers have emulated, ‘‘is not the profit haven AT&T said, but it
has simplified its rates and draws a strong contrast to long-distance
prices,'' Freedman said.
Airtime costs consumers a dime a minute only if they use 500 minutes or
less per month, and carriers are counting for revenues on the prospect that
their customers will ‘‘break out of the (500 minute) bundle,'' Bensche
said.
While Leibowitz said newcomers to a saturated wireless carrier market
will have trouble gaining cash flow, Bensche said incumbents have their
own competitive concerns to address.
‘‘The key number is gross adds. If there are four players in a market and
you assume each gets a fourth, incumbents will have a real challenge in
outswimming the disconnects,'' he said.
‘‘The [regional Bell operating companies'] net adds year over year are
poor, but they combine 1.9 (MHz) and 800 (MHz) markets so you can't
see what's going on.''
In general, however, Bensche characterized 1998 as a very good year for
wireless carriers because of the advent of one-rate plans, the expansion of
networks to cover more of the population and the declines in handset
prices.
On the other hand, Freedman said, ‘‘I had hoped the industry had
reached some level of common sense about handset subsidies, so I am
dismayed this quarter to see the rebates.
‘‘Yes, I understand that manufacturers are reducing prices, but why not
keep some of the revenues?''
As an investment opportunity, wireless carrier stocks are a reasonably
good bet going forward, Leibowitz said.
‘‘The market is ignoring the forest, the macroeconomic factors like
demand and growth, for the trees, the concerns about competitive issues,
capital (expense) requirements, etc.,'' he said.
‘‘The valuations are attractive. It is possible that consumer demand will be
greater than forecast. Potential for further consolidation is there and
provides investment opportunities.''
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