Mobile Mania>
Mobile mania
Boom-boom growth
in the wireless world
By Simon Walsh, CBS Marketwatch
Last Update: 4:25 PM ET Jun 18, 1999
Also: NewsWatch
WASHINGTON (CBS.MW) -- It's been a wild year in the wireless world.
Cell-phone providers Nextel and AirTouch have both
posted jaw-dropping gains north of 50 percent. And
Sprint PCS has more than doubled.
Time for a correction?
Don't hold your breath. That seems to be the
consensus among analysts and market watchers.
"They may very well grow into these numbers," says
Steven Yanis, head of telecom research at Banc of
America Securities. "The growth rate of the entire
industry has accelerated pretty dramatically over the
last six months."
Sprint PCS Group (PCS: news, msgs) is Exhibit A.
In the first quarter, the wireless unit of Sprint Corp.
(FON: news, msgs) side-stepped the typical
post-holiday blahs and racked up 763,000 new
subscribers, beating estimates. That was on top of
the record 836,000 subscribers Sprint added during
the fourth-quarter holiday blitz.
Growth across the industry is being driven by lower prices and improved
call quality. Carriers are switching to flat-rate plans. And crisper digital
signals are replacing fuzzier analog systems.
Junk the Trimline?
Wireless carriers plan to keep the ball rolling by pushing into the residential
market, where there's still lots of room for growth. Some say service is
already so cheap you should rip out the old plug-in at home. "Your wireless
phone can be your only phone," AT&T (T: news, msgs) says in ads for its
Digital One Rate service, which runs about 15 cents a minute.
Whatever your feelings about the old Trimline on the bedside table, there's
no doubt that lower prices are ushering lots of pilgrims into the wireless
frontier.
"Packaged rate plans have really stimulated usage, especially in the 10- to
15-cent-a-minute range," says Frederick Moran, a telecom analyst and
managing director at ING Barings. "There's no longer the worry about the
size of the bill."
Next up: Pre-paid calling plans. In California, road warriors can already
walk into a 7-Eleven and buy an $80 package from AirTouch
Communications Inc. (ATC: news, msgs) that includes a phone and 20
minutes of calling time. The industry will need tactics like these to boost its
subscriber base, which at the end of last year totaled 68 million people,
about 25 percent of the U.S. population.
For investors, boom-boom growth is only part of the attraction. Another big
turn-on is the consolidation roiling the industry.
Linking up
In January, for example, Britain's Vodaphone Group (VOD: news, msgs)
agreed to buy AirTouch and form Vodafone AirTouch PLC. The price tag
at the time was $56 billion, an eye-popping $4,000 for each of AirTouch's
14 million subscribers.
More mergers are expected, and prices have risen in anticipation. The chart
below tells the story, showing the year-to-date performance of the three
biggest pure-play wireless carriers: Sprint PCS (PCS: news, msgs), Nextel
Communications Inc. (NXTL: news, msgs) and AirTouch (ATI: news,
msgs).
Nextel is the last
independent carrier with
a national network. So
it's the juiciest target.
Not surprisingly, the
wireless wannabe MCI
WorldCom Inc.
(WCOM: news, msgs)
came knocking. The
two companies had a long chat but eventually deadlocked on price and
agreed to end merger talks last month. Still, many market watchers expect
Nextel to merge or be bought sooner or later, and they're holding the stock
in anticipation.
Regional flavor
Nextel's not the only game in town, though. Investors have a wide range of
smaller wireless companies from which to choose, including Omnipoint
Corp. (OMPT: news, msgs), Ariel Communications Inc. (AERL: news,
msgs), Powertel Inc. (PTEL: news, msgs) and VoiceStream Wireless Corp.
(VSTR: news, msgs).
None of those has a national footprint, as does Nextel. But each offers a
substantial regional system that could fill a hole for one of the bigger
players. And, not surprisingly, each is up sharply this year. The chart below
shows the gains posted by these carriers since the start of the year.
(VoiceStream was left off the chart, due to the fact it only started trading in
May.)
What's next?
Government regulators
are considering a plan
that could make
wireless still more
affordable. It would
shift the costs of
incoming calls from the
person who answers
the phone to the
person who makes the
call. In some markets, incoming calls currently cost a dollar or more.
Carriers are also racing to build services that let subscribers send and
receive faxes and e-mail and even surf the Web. These services are likely
to be a hit with the jet-set crowd and could add a lot of incremental
revenue.
Wireless companies have pinned their hopes on a new technology called
code division multiple access, or CDMA, which lets them pack more
conversations and data downloads into the existing broadband spectrum.
But there hasn't been a general agreement on exactly how CDMA will
work. That has slowed development.
Transatlantic alliance
In March, however, Qualcomm Inc. (QCOM: news, msgs) -- a company at
the forefront of this technology -- reached a settlement with Sweden's
Ericsson Telephone (ERICY: news, msgs). The companies agreed to
support a single CDMA standard.
Many analysts now believe that this CDMA protocol will become the global
platform for data-driven wireless applications, such as e-mail and Internet
access. Qualcomm's stock has more than quadrupled so far this year,
driven in large part by the Ericsson settlement and blowout earnings in the
second quarter. And Ericsson shares on Friday hit their highest level since
last July.
Not that it's all smooth
sailing in the wireless
world. The industry still
faces many challenges.
At 25 percent, the
percentage of
Americans using
wireless phones still
lags behind the 30 or
even 50 percent levels reported in some parts of Europe.
And "churn" is a big worry, with all the major carriers losing a quarter or
more of their customers each year.
But many analysts say the one-two punch of lower prices and whizz-bang
digital features will cure these ills. "Look," says Carl Walker, a telecom
analyst at Sanford C. Bernstein, "we may not get to the penetration levels
you see overseas, but that doesn't mean you can't see very solid growth."
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