Bell Atlantic,AirTouch deal a harbinger
March toward wireless consolidation likely to proceed
By Jeffry Bartash, CBS MarketWatch
Last Update: 5:32 PM ET Jan 4, 1999
WASHINGTON (CBS.MW) -- The proposed $45 billion marriage of Bell Atlantic and AirTouch Communications, if consummated, likely will stimulate a fresh wave of consolidation in the wireless-phone sector and further knock down prices for consumers.
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Bell Atlantic (BEL) and AirTouch (ATI), which acknowledged merger talks on Monday, would be the ultimate marriage of convenience, analysts say. Bell Atlantic has strong wireless operations in the East and AirTouch in the West, They use the same wireless technology, so-called CDMA, and operate a joint venture, PrimeCo, which operates extensively overseas.
The two have been driven together in large part by the success of the "Digital 1" plan of AT&T, the nation's largest wireless operator and only one of two U.S. companies to offer wireless service nationwide (Sprint is the other). Under that plan, subscribers avoid costly and unpopular roaming charges, instead paying a set amount of money for a set amount of air time. Roaming charges are incurred when wireless users call someone outside the coverage area of their network.
"They both need a national presence to compete with AT&T (T) and Sprint (FON)," said David Cooperstein, senior analyst of telecom strategies at Forrester Research in Cambridge, Mass.
Industry scramble
The creation of a third national provider, in turn, could intensify competition and drive down prices even more for consumers. Just as important, it could set off a scramble among other large telecom concerns to bolster their own networks while forcing smaller providers to team up, shift focus to other wireless segments like data -- or fold.
"This puts pressure on local phone companies that didn't have a national presence," said Brian Cotton, research director of telecommunications at Frost & Sullivan. "It's going to raise the level of competition in the wireless sector."
There aren't any easy paths for others to become national providers, however. The rest of the industry is patchwork of smaller, regional players who using a mix of technologies. For that reason, analysts believe the smaller firms will need to bulk up through acquisitions, strike alliances or find buyers, particularly among remaining Baby Bells.
"These companies are in deep trouble now," said Eric Melloul, a telecom analyst at Argus Research, citing such players as Aerial Communications (AERL), Omnipoint (OMPT) and PowerTel (PTEL), which employ a less widely used GSM standard. All are sharply off their 52-week stock highs.
Ringing up the Bells
The other Bells aren't in the greatest position, however. SBC Communications (SBC) plans to acquire Ameritech (AIT), which would give it control of a large swath of the middle of the U.S. market. Yet the pair use different standards for transmission of wireless calls, a significant hurdle that would have to be overcome before the combined company could begin to roll out national services.
The remaining Bells, Bell South (BLS) and U S West (USW), are regionally focused. Still, analysts think those companies will snap up smaller companies and strengthen holds on their territories. While many consumers may want national wireless service, many others won't need to call outside of their regions.
Even if those Bells offer strong regional service, Bell Atlantic would have one advantage they don't: It could eventually attack their local monopolies through an aggressive wireless strategy as prices fall closer to levels of regular phone service, but the other Bells could not return in kind.
"The big issue is to what extent Bell Atlantic and AirTouch would be able to compete in the local phone market," Cooperstein said.
Where's WorldCom?
Conspicuously absent from the wireless picture is phone giant MCI WorldCom (MCOM). Industry observers aren't sure MCI WorldCom wants a large wireless network, however. The company has been more focused on the business, Internet and international segments and might see too much hassle and too little profit in a wireless market increasingly focused on consumers.
"MCI has virtually no wireless services to speak of," Cooperstein said. "MCI is not really thrilled with the whole idea of the consumer market."
Still, demand by customers could prompt MCI WorldCom to review its decision. While the company has had a history of acquiring the parts it was missing, it also could establish a national network by reselling wireless services, a strategy MCI seriously considered before its acquisition last year by WorldCom.
"Wireless resale could be a way for companies like MCI WorldCom to have a national presence," Cotton said.
Another possibility, which analysts consider remote right now, is the acquisition of the lone remaining independent national wireless operator, the quirky Nextel Communications (NXTL). Nextel also focuses on the business segment, which dovetails with MCI WorldCom's strategy, but it uses a hybrid digital-SMR standard and targets a different audience (mobile operators such as cabbies and truckers).
No end in sight
Of course, there are no guarantees Bell Atlantic and AirTouch will resolve the sticking points to a deal. And federal regulators, already swamped with a wave of telecom mergers, are likely to cast a skeptical eye on any arrangement.
Nevertheless, analysts expect both companies to pursue a national strategy. Bell Atlantic's pending acquisition of GTE Corp. (GTE) signals its desire to become a provider of a broad range of telecom services, while AirTouch has made it clear it's entertaining offers.
With prices of wireless services continuing to fall, it behooves operators to expand to spread the fixed costs of their networks across as many customers as possible. In 1999, those pressures will grow, as wireless is set to become a serious competitor for all of a consumers' needs, instead of a just niche product.
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