There's a golden age ahead in the wireless business—to judge from the wild bidding for AirTouch. But when are we going to get there?
Cell phones for the masses
By Carleen Hawn
WHEN THE DUST SETTLED on the bidding war for AirTouch Communications, Vodafone emerged as the proud owner (once the $56 billion deal closes) of 14 million new cellular customers—at an effective cost of $4,300 each. How could any customer base be worth so much money?
Maybe it isn't. But multibillion-dollar takeovers are a quick, if costly, way to get around a daunting drawback in the U.S., the world's biggest wireless market: the penetration problem. Some 67 million Americans now tote cell phones, a mere 24% penetration, far lower than in Finland, Israel, Hong Kong and Italy, where the rates are 35% to 50% and climbing fast. The U.S. customer base grows at only three percentage points per year—a lazy pace that would take 25 years to sign up everyone.
Hence the AirTouch attraction: More than half, or 8.4 million, of its customers are in the U.S. AirTouch stock was trading at $60 when Bell Atlantic began wooing the company; several rivals took a look, too, only to be trumped by Vodafone at $97 a share. That is a pricey 21 times cash flow, and producing a payoff will require raising penetration.
All wireless players must do the same, for the cozy duopolies that reigned in local markets when cellular service began in 1983 began to fall in 1995. Now six carriers compete in most of the top 15 U.S. markets. Each year 25% or more of a carrier's customers switch to a rival or quit, a churn rate that could rise as competition spreads. Worse, both average revenue and minutes of use per subscriber have declined in the past five years.
Cellular phone executives know what they are up against. "We have got to start reaching new segments of customers, ones we've never had before," says Dennis Strigl, chief executive of Bell Atlantic's wireless business. "It's teens, the retired population, the soccer moms."
Easier said than done. "I see absolutely no reason to use a wireless phone," says Ann Nord, 63, a retired nurse in Anacortes, Wash. "I'm not out at night by myself or on the freeways so I don't need it for safety. I have a phone and a fax in my home. I use e-mail. A wireless phone would be just another piece of equipment to take care of."
The higher penetration rates overseas are due in part to interminable waits for regular wired service and antiquated wired networks, factors that don't exist in the U.S. But reaching the Ann Nords here will require clearing some hurdles created by the carriers themselves. Wireless service is still too expensive for everyday use. Service is spotty. And wireless phones have an image problem here. They are viewed as pricey toys brandished by self-obsessed professionals and spoiled teenagers. Using a cell-phone at tableside in a restaurant is still seen as gauche in the U.S.; in Italy it is de rigueur.
In the U.S. wireless service costs an average of 30 cents a minute and runs up to 75 cents. Some high-use plans charge a dime a minute, but the cheapest rates will have to fall to 3 cents within a few years to unlock new growth, says Andrew Cole, a consultant with Renaissance Worldwide. Now do the math: If overall rates fall by, say, two-thirds, even a 200% surge in usage leaves you treading water.
Service also will have to improve. Only AT&T, Sprint PCS and Nextel Communications have networks large enough to carry calls coast to coast, and even their coverage isn't ubiquitous. Worse, while wireless phones overseas use a single standard (called GSM), in the U.S. five incompatible designs compete: cellular analog; the digital "time division" multiplexing favored by AT&T; the digital "code division" multiplexing favored by most other carriers; GSM; and then a fifth format from Nextel. No phone can handle all five formats.
Even local coverage can be uneven because carriers haven't installed enough cell transmission stations. The industry brags that only 2% of calls don't go through; even if you take that claim at face value, that still means 92 million failed calls every month.
Yet future growth could rely on convincing the reluctant among us that wireless service is good enough to replace regular phones entirely. Do that, says Hilary Mine of Probe Research, and "realistically the wireless industry could get penetration up to 40% in the U.S."
That will require a new round of jolting price cuts—not to mention a new image for wireless service as an affordable necessity rather than the power tool of the corporate elite. In Plano, Tex., AT&T has a wireless trial offering unlimited local calls for $40 a month. Nationwide, AT&T's hot Digital One Rate plan offers 600 minutes of talk—with no fees for "roaming" or out-of-network calls—for $90 a month. "Your wireless phone can be your only phone," AT&T ads promise.
Nextel, Sprint PCS, Bell Atlantic and Omnipoint now have similar plans. The problem is these flat-rate plans appeal to existing, high-volume customers more so than to new users. They are preaching to the converted. Another challenge: In the U.S. you must pay for both incoming and outgoing wireless calls; in Europe you don't get hit for calls others make to you. That is why, overseas, AirTouch customers generate 40% more minutes of use and 36% more revenue each month than customers here ($61 a month per user in Europe, $45 in the U.S.).
U.S. users worry about bills spiraling out of control. Jeffrey Tahler, 25, works in the movie industry in New York and pays Bell Atlantic $50 a month for 30 minutes of talk time, plus free evenings and weekends. Yet he makes just five calls a day. "It's still very expensive because a weekday incoming call costs over a dollar. So I leave my phone turned off 75% of the time," he says.
Carriers are trying calling-party-pays in a few markets (AT&T in Minnesota, Bell Atlantic in Arizona). But that requires local phone monopolies to bill callers, and they are often unwilling. The wireless industry has asked the Federal Communications Commission to intervene, but the feds are reluctant to get involved.
Wireless marketers are trying other ways to overcome consumer reluctance. AirTouch sells prepaid wireless packages at 7-Eleven and Circle K to entice teens and moderate-income consumers who might not walk into a wireless store. For $79 shoppers get a phone and a calling card good for 20 minutes of talk time. "We're hoping that it will be an impulse buy that consumers will stumble across while they're buying bread," says David Whetstone, an AirTouch marketing director. Of the 1.4 million new subscribers that AirTouch picked up in 1998, 10% came from prepaid plans.
Still other carriers are trying to pitch wireless as a family matter. So-called companion packages from Bell Atlantic, AirTouch, BellSouth and Pacific Bell offer customers additional phones at little to no cost to give to their children or spouses. With one wireless account you could have two phones and use one to call your daughter on the other when you get separated at the mall.
Look for such efforts to accelerate. If carriers fail to sell to the masses, their business could look more and more like a zero-sum marketing game in which a fixed collection of customers gets churned back and forth. Note to Vodafone: A zero-sum customer base is not worth $4,300 per subscriber.
forbes.com
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