IMO there will definitely be Wireless consolidation...
However, I'm not sure it will begin this year, in 2003 or later...for many reasons. It seems that of the six biggest wireless firms (Verizon, Cingular, AT&T Wireless, Sprint PCS, Nextel Communications, and VoiceStream Wireless), the most logical potential wireless consolidation (merging) may occur between Verizon and Sprint PCS (because they both use a technology called CDMA-"Code Division Multiple Access"), and between AT&T Wireless, Cingular, and/or VoiceStream (as they all use GSM-"Global Standard for Mobile communications). Of course there are also many other minor little wireless players that may very well get grabbed up, before the "big boys" do their thing as far as any major "consolidation" between them. But I'm convinced that we'll eventually get down to only about 3 or 4 major players in the wireless game.
Whether AT&T Wireless (AWE) and Cingular are the first two to merge, I have no idea. But it's certainly a very real possibility based on the recent press rumors of them already in "talks." Here's an excellent article which came out yesterday, that goes into much detail speculating about the potential as well as the pros & cons regarding future mergers in the wireless arena:
seattletimes.nwsource.com
Monday, April 15, 2002, 07:43 p.m. Pacific
Merger has nice ring for wireless firms
By Sharon Pian Chan
Seattle Times technology reporter
They call it The Rule of Three. Three major burger chains -- McDonald's, Burger King and Wendy's. Three major television networks -- NBC, ABC and CBS. Three U.S. carmakers -- GM, Ford and DaimlerChrysler.
So far, the six national carriers in the wireless industry have bent the rule. But observers say Puget Sound-area giants AT&T Wireless and VoiceStream Wireless and their four counterparts, Cingular Wireless, Nextel Communications, Sprint PCS and Verizon Wireless, may not be long for this world.
Given the brutal competition, they expect the big six, each with at least $4 billion in sales a year, to consolidate in some combination within the next year so that only two or three remain.
If that's the case, the immediate result may be an easing of the relentless price and promotion competition that has resulted in lighter customer bills. But the surviving companies also could be in stronger positions to expand services and upgrade technology.
"Consolidation in wireless is a natural," said Jeff Kagan, a telecommunications-industry analyst based in Atlanta. "We only have three hamburger chains for a reason. It's because they need to make money."
Many of the rumors of mergers and acquisitions have come from analysts whose speculation has recently filled the pages of financial publications. But the carriers seem to agree.
"Consolidation does represent an opportunity. It's a good thing," said John Stanton, chief executive of VoiceStream Wireless, the Bellevue-based U.S. subsidiary of Deutsche Telekom.
Said Bob Johnson, executive vice president of national operations at Redmond-based AT&T Wireless: "For the long term, there's going to need to be (fewer) competitors out there."
The subject has become so quotidian that at the wireless industry's annual trade show last month, one executive was heard joking, "It seems consolidation is the answer to everything."
For consumers, the competition has meant getting the lowest prices ever for wireless service, with most carriers enticing customers with no charges for long-distance calls. In the past 10 years, the average monthly bill has fallen 38.9 percent to about $45 a customer.
The competition has hurt all the carriers. Lower bills for customers translate into slower growth in sales and profit, and that's reflected in the companies' stock prices. For example, AT&T Wireless' share price has fallen 44.1 percent since the beginning of this year. At the same time, the companies are faced with the need to constantly improve technology, incurring heavy expenditures and debt loads.
The churn problem
The carriers' problem isn't persuading people to use wireless phones. Even though the pace has slowed slightly this year, the U.S. market still has plenty of room to expand. About 44 percent of the U.S. population uses a wireless phone, and many analysts expect U.S. subscriber rates to eventually rival those of other countries, including Japan, where 70 percent of the population uses wireless phones.
Instead, the biggest problem is the constant subscriber turnover, or what the industry calls "churn." On average, carriers lose at least 2 percent of their subscribers each month. Over a year, that adds up to replacing almost one-fourth of their subscriber base.
Meanwhile, the cost of adding new customers remains high. AT&T Wireless spent $334 last year to attract each new subscriber.
As in the long-distance industry in the 1990s, customers are switching carriers to get $10 a month in savings or, in some cases, even a free new phone. Voice service has become a commodity that can be bought from any carrier.
The only thing keeping many subscribers from switching is the difficulty of keeping their own phone number. But that hurdle is likely to disappear soon: The Federal Communications Commission is expected to allow customers to take their phone numbers with them when they switch carriers, a feature called "number portability."
Though customers continue to switch, companies aren't doing much to reward customer loyalty. Many customers are locked into the rate plan they signed up with, even as prices decline. Carriers don't give existing customers new phones, while subscriber payments subsidize handset discounts for new customers.
Benefits of consolidation
Observers say that eliminating a few competitors through mergers would stem the loss of subscribers.
"What you have to do is close the back door," Kagan says. "They've got plenty of customers coming in the front door, but they're losing business as fast as they're gaining it."
Merging with another company could also help a carrier lower the cost of upgrading its network and fill in holes in its coverage.
Carriers are establishing new technologies that go beyond voice traffic and its diminishing per-user revenue. That upgrade will offer higher speeds for transmitting data wirelessly, commonly referred to as 2.5G, for 2.5 generation technology.
Such an undertaking is extremely expensive. AT&T Wireless plans to spend more than $5 billion upgrading its network this year. Many carriers are planning complete overhauls in the next five years in order to offer data services at broadband speeds, often called 3G, for third generation.
Observers say carriers will have to consolidate in order to roll out 3G services since many of them are constrained by the limited availability of "spectrum," the airwaves they license from the government to run service on. The FCC isn't expected to make new spectrum available until 2006. It's also expected to lift restrictions at the end of the year on how much spectrum a carrier can own in a certain market, which may open a door to potential mergers.
VoiceStream's Stanton says if that happens, companies that use the same technological platform are the most likely to merge.
VoiceStream, AT&T Wireless and Cingular Wireless all use a platform called global standard for mobile communications, or GSM. Verizon Wireless and Sprint PCS use a technology called code division multiple access, or CDMA, which is incompatible with GSM.
The third technology alternative is Nextel, which uses an incompatible technology called integrated digital-enhanced network, or iDEN.
"It's like a high-school dance," Stanton said. "Everyone's standing around, but nobody knows who's going to pair up with who. The earliest (carriers) will talk is summer, fall."
At this point, though, each carrier has significant issues of its own to confront. Verizon Wireless and Cingular have both struggled to integrate their nationwide operations. AT&T Wireless has to improve its cash-flow margins. Nextel Communications has a large amount of debt. Sprint is saddled with a money-losing long-distance business.
Many financial realities are working against a potential merger. The telecommunications market has been beaten down this year, and the capital to go shopping for another company is sparse. Even with a stock-based acquisition, the share prices of all carriers have been so depressed this year that it's unclear whether shareholders would vote for a merger that would further dilute their holdings.
Some observers wonder whether eliminating one or two competitors in a market with five or six companies would really halt price competition and high churn. A merger might also face antitrust issues, given how many carriers have overlapping markets.
"In this market right now, any move is going to be looked at as too bold a move," said Goli Ameri, an analyst with eTinium, a Portland research company.
"In six months, a year, first or second quarter of 2003, I could see some consolidation happening. But right now, it's one of those typical industry hypes."
Sharon Pian Chan can be reached at 206-464-2958 or schan@seattletimes.com.
Copyright © 2002 The Seattle Times Company
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