CINGULAR RESULTS SPARK CONSOLIDATION TALK

Cingular Wireless' unanticipated increase in second-quarter subscriber growth was a ray of sunlight for the gloomy wireless industry, but the carrier's reliance on competitive pricing to beef up net additions is creating a model that likely will not sustain all six major carriers in the long run.

Both Cingular and Verizon Wireless have introduced new pricing plans in the past quarter and benefited with net subscriber adds above analysts' expectations. However, continued price slashing eventually will lead to market M&A.

“The only thing to alleviate irrational pricing is consolidation,” said Craig Mallitz, vice president and wireless services analyst for Legg Mason. “It would be an upside to the industry as a whole.”

Deutsche Telekom's dismissal of CEO Ron Sommer should clear the way for the German giant's divestiture of VoiceStream (Telephony, July 22, page 14). With Cingular cutting its 2002 capex to between $4.2 billion and $4.6 billion from a previous range of $5.4 billion and $5.8 billion, it could be preparing its bankroll for a VoiceStream acquisition.

“Cingular has to look toward the long term,” said Guzman & Co. analyst Patrick Comack. “Wireless prices are getting hammered by the demise in the telecom industry, but it has to take advantage of this and buy VoiceStream. AT&T Wireless really is not in a position to bid for VoiceStream, and VoiceStream is in no position to buy.”

Because SBC and BellSouth have been hit hard in the most recent market gyrations, a Cingular acquisition of VoiceStream may be shelved, Mallitz said.

Shares of AT&T Wireless Services fell more than 20% after the company warned it would add 20% fewer customers in 2002 than previously expected. The company added 417,000 customers in the second quarter, short of analysts' estimates of 550,000 net subscribers. In the second quarter, Cingular credited the addition of 353,000 net new customers to lower churn and the introduction of new price plans earlier this year. Analysts had anticipated the company would add about 300,000 subscribers in the quarter.

Despite beating net add expectations, BellSouth said during its earnings call that Cingular posted higher expenses because of increased roaming and customer acquisition costs as well as a greater volume of long-distance customers on its new price plan.

Cingular's operating income fell to $722 million from $759 million a year ago while operating expenses rose 6.6% to $1.18 billion. However, churn did improve during the quarter, dropping to 2.7% from 2.9% in the previous quarter.