The Titans of Wireless Are Tearing Down Regional Fences
By SETH SCHIESEL
eorge F. Schmitt, president of Omnipoint Communications, a small wireless phone carrier,
recalls sitting in his kitchen in Montville, N.J., one morning last May with Omni, his pet blue
and gold parrot, and hardly believing what he was hearing.
In a public conference call, top executives from the AT&T Corporation, the nation's biggest
communications company, were explaining how they meant to rewrite the de facto rules for pricing
wireless calls. Not only would AT&T do away with long-distance charges for wireless, but it said it
would also end the additional "roaming" fees for using a phone when traveling to an area covered by
a different company's network -- a charge that consumers had been resenting since the first mobile
phones made their debut in the 1980's.
It certainly sounded like a great new cost-saving convenience for wireless customers. But the move
also seemed such a drastic economic departure from the industry's conventional practices that
Schmitt wondered how anyone -- even mighty AT&T -- could afford it.
"I stayed home so I could listen to the call that morning, and I was sitting there thinking, 'How can
they do this?"' Schmitt said in an interview last week. "After the call was over I sat there for a long
time with Omni, but until I saw their ads I think I really underestimated it. They did an outstanding
job of changing who would use AT&T and pulling customers in."
Schmitt may have had only his parrot to keep him company that morning, but he was hardly alone. It
took many communications experts time to realize that by introducing the plan that day that it called
Digital One Rate, AT&T had changed the ground rules of the wireless business in the United States.
For some, the depth of that shift may not have become clear until Dec 31, when reports emerged
that the Bell Atlantic Corp., the nation's No. 1 local phone company, was trying to acquire the leader
in wireless, the Airtouch Corp., based in San Francisco, for around $45 billion. Bell Atlantic had
apparently decided that being merely the third-biggest wireless carrier in the United States was not
enough and that it was prepared to dilute its future earnings to acquire Airtouch's network.
And last week it became clear that Bell Atlantic was not alone in coveting Airtouch. Vodafone
Group PLC, Britain's largest mobile phone carrier, also jumped into the bidding. And yesterday
reports emerged that British Telecom PLC was also considering making an offer. MCI Worldcom
Inc. weighed a bid last week, but decided to pass.
"Given the way the market is moving, there is certainly virtue in having a national footprint, whether
you achieve that through ownership or through partnership," said Jonathan Marshall, an Airtouch
spokesman.
Bell Atlantic declined to comment.
Whatever the outcome of the Airtouch bidding war, analysts do not expect that takeover to be the
industry's last.
In other parts of the communications industry, it is an old story: You need scale to thrive, and
perhaps even to survive. But in the wireless sector it is being told these days for the first time. As
AT&T and other major players, like Nextel and Sprint, use their national footprints to create
leverage in the marketplace, smaller, regional carriers like Omnipoint and even the Baby Bells are
feeling the pinch.
For consumers, the carriers' move to a national battlefield means lower rates, better service and
broader coverage. For the carriers, however, the changes can mean slimmer profit margins, tougher
competition and a drive to find partners with deep pockets.
"The little guy is getting squeezed," said John Bensche, a wireless analyst at Lehman Brothers, who
acknowledges that he also initially underestimated the impact of AT&T's new plan. "AT&T sort of
exploded the market with One Rate. For the regional guys it's going to be hard; it's going to be very
hard. You can make money. You're not going to go bankrupt. But you may be doomed to sort of
subpar returns. So I think some of these guys are going to merge."
Besides reflecting the impact of national competition, the looming shake-out may be an inevitable
consequence of the sheer proliferation of wireless carriers.
Until a few years ago, almost every American metropolitan market had only two cellular carriers. But
in 1996 the Federal Communications Commission auctioned rights to a big swath of frequencies, and
that led to the creation in 1997 of as many as four new wireless carriers per market in some places.
What was good for competition, however, has not always been good for the carriers' books.
The problem is that a new wireless carrier must spend millions, sometimes billions, of dollars to build
an extensive network before signing up a single customer. The competition, meanwhile, may be able
to charge lower rates because its network is already in place. Or the new entrant often finds itself
building alongside a giant like AT&T or Sprint that can either pay for the construction out of the cash
flow generated from its existing long-distance business or can afford to borrow billions at low interest
rates.
"We're clearly seeing a move to where more market share is being captured by national services,"
said Andrew Sukawaty, chief executive of the Sprint PCS venture. Sprint PCS is not yet among the
top 10 wireless carriers, but in the 1996 auctions, it bought licenses covering almost the entire
country.
"This has become a national financing game," Sukawaty said, "and it's hard to see how the local and
small-business players will be able to make it."
In some ways, Schmitt's Omnipoint -- which offers service in New York City, elsewhere in the
Northeast and in Miami -- provides a good example of the challenges facing small wireless carriers.
Pressed for cash, Omnipoint was able to secure $375 million in new financing late last year, mostly
from companies with which it already does business, Siemens of Germany and Northern Telecom of
Canada. Nonetheless, the company is canvassing foreign communications companies in search of
someone to buy a big equity stake or perhaps even to acquire the whole company.
Still, Omnipoint is unusual among small carriers in being able to secure additional financing at a
crucial stage. Other carriers, like Pocket Communications, which owned a license for the Chicago
area, have filed for bankruptcy protection.
No wonder some small regional carriers are forming partnerships in hopes of expanding their service
areas and pooling marketing costs. One such group is the GSM Alliance. The alliance takes its name
from GSM, or global system for mobile communications, a digital wireless technology that is used
widely in Europe and Asia but has not become as popular in the United States. Among the GSM
Alliance members, which have banded together to form roaming agreements, are Omnipoint, Aerial
Communications, Powertel, Western Wireless and Microcell of Canada.
But the GSM Alliance, while far from a failure, has not yet made much of a dent in the marketplace.
Some small-company executives involved in the group say that it is being held back by the caution of
two Baby Bell members, Bell South and SBC Communications. Those executives said the Bell
companies, attuned to regulatory concerns, have been reluctant to back initiatives, like collaborative
pricing plans, that were proposed by other members of the group.
But people close to the Bells note that one company's foot-dragging may be another's compliance
with antitrust laws. SBC, for example, is still trying to gain regulatory approval of its planned
acquisition of the regional phone company Ameritech, which recently put its Chicago wireless system
up for sale to help address regulators' concerns. That system should fetch more than $2 billion.
Although many people on Wall Street and in the communications industry expect some of the GSM
members eventually to merge as they try to expand their coverage areas, a role may remain for
regional carriers in the wireless business. Earle Mauldin, who oversees the BellSouth wireless
operations, said that only about a quarter of his company's wireless customers roam outside their
home markets. And Stanley T. Sigman, who runs SBC's wireless business, said only 4 percent of his
customers roam outside SBC's territory.
But for AT&T, with its national presence, those regional arguments do not hold up.
"If you were paying 80 cents a minute when you're on the road making a long-distance call, would
you roam?" said Dan Hesse, president of AT&T's wireless operation. "It's a chicken-and-egg thing."
And even some of the regional carriers acknowledge the growing allure of a national reach. "Most
people are calling a few towns over to their mom and dad or their place of work or where their kids
go to school," said John W. Stanton, chairman of Western Wireless, one of the larger regional
carriers, and chairman of the Cellular Telephone Industry Association.
"There will clearly be some regional players playing roles in the market," Stanton said. "There will
also be a few national players that will have the vast majority of subscribers."
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