CINGULAR'S 2001 MARKED BY A LOT OF PAIN, LITTLE GAIN

Cingular Wireless recently celebrated its first anniversary, yet the joint-venture marriage between BellSouth and SBC Communications looks rocky given the recent criticism over its costly third-generation plan and poor subscriber additions in the third and fourth quarters.

“Right now it's one of the companies that might not be around in a couple of years,” said Phil Redman, research director for GartnerGroup. “It has no clear strategy, sliding subscribership and poorly made technology decisions.”

Cost-conscious analysts have been critical of CEO Stephen Carter's announcement that Cingular would overlay its TDMA network with an expensive GSM/GPRS/EDGE network for about $4 billion — part of this year's capital expenditure budget of almost $6 billion — in the face of two quarters of dismal subscriber additions. But the carrier and its Bell company parents insist they are paving the way for positive long-term results.

Any technology choice would have been a painful move. GSM was the logical choice because 30% of Cingular's pops are already GSM.

“We did the analysis in terms of infrastructure and cost, handset costs and roaming costs,” said Kris Rinne, vice president of technology and product realization. “GSM/GPRS was the better choice for us.”

However, analysts question whether the country's second-largest wireless carrier will achieve the its much-ballyhooed economies of scale because it is overlaying GSM technology in the 850 MHz band, a frequency not widely used around the world for GSM.

Rinne said the propagation of the 800 MHz band will make the technology more economical because it can deploy fewer base stations. GSM equipment already is made in the 900 MHz band in Europe and won't require much modification to work at 800 MHz, she said.

Cingular also must continue to spend a large chunk of money on TDMA technology to keep up with capacity and coverage as it prepares to overlay its networks with GSM. In October, the carrier signed a deal with Lucent Technologies to expand TDMA in 30 markets. Sources close to Cingular said the deal is valued at more than $750 million.

Industry watchers speculate Cingular will have to implement a costly amount of cell-splitting to accommodate the GSM network, but Rinne said the carrier is pushing customers off the analog network to free up extra spectrum. As a result, Cingular anticipates it can change the network's reuse factor to free up more spectrum without cell splitting, she said.

To help defray buildout costs, Cingular has turned to network sharing deals. Last week, Cingular and AT&T Wireless agreed to share spectrum and networks along 3000 miles of interstate highways in Midwestern and Western states to reduce buildout and roaming costs. AT&T Wireless, led by CEO John Zeglis, is projecting $5 billion in capital expenditures for 2002 and wants to minimize the costs of rolling out GPRS in rural areas.

In October, the carrier signed a similar deal with VoiceStream to share infrastructure in markets such as New York where both were lacking in coverage. The carriers said the deal would reduce buildout costs while allowing them to exit easily in the future because they are not relinquishing spectrum licenses or operating control of their networks. VoiceStream CEO John Stanton said the deal would save his company at least $1 billion in the first three years.

Just like its painful technology transition, Cingular's parent companies have gone through some agonizing cleanup processes during the last two quarters. BellSouth found itself once again defending Cingular's poor subscriber additions as it works to remove lower-revenue prepaid and analog customers from its books.

“Far more attention needs to be placed on the fundamentals of wireless growth rather than customer counts,” BellSouth Chief Financial Officer Ron Dykes told analysts earlier this month, noting that Cingular's purging has resulted in an increase in revenues, operating income and EBITDA. But average revenue per user fell $1.63, a decrease of 3% from the fourth quarter 2001.

Such results have renewed rumors that BellSouth may be interested in leaving the partnership to pursue a deal with CDMA player Sprint PCS. Carter, a former SBC executive, is known for his squabbles with BellSouth management, which has always favored CDMA over GSM technology. But BellSouth maintains it is happy with the Cingular arrangement.

“We're pleased with the operations,” a BellSouth spokesman said. “Revenue increased for BellSouth… Cingular's brand has gone from zero brand recognition to one of the highest recognitions, according to consumer surveys.”

CINGULAR WIRELESS' RECENT HEADLINES

2001
OCTOBER
OCT. 15
Cingular and GSM carrier VoiceStream, led by CEO John Stanton, agree to share wireless networks in New York, California and Nevada

OCT. 19
Cingular adds a dismal 95,000 customers in the third quarter, well below the 700,000 expected by analysts

NOVEMBER
NOV. 2
Cingular CEO Stephen Carter announces costly plans to overlay its TDMA network with GSM/GPRS/EDGE

DECEMBER

2002
JANUARY
JAN. 22
Cingular reports 325,000 customers in the fourth quarter, lower than the 700,000 customers analysts expected

JAN. 28
Cingular enters a network sharing arrangement with AT&T Wireless, which also is transitioning to a GSM-based migration path under CEO John Zeglis

FEBRUARY

WIRELESS DATA SCORECARD

Verizon Wireless Launched 1X technology in 20% of its markets with nationwide availability by the end of the year

Cingular Wireless Nationwide coverage of GSM/GPRS/EDGE by end of 2003

AT&T Wireless Nationwide GSM/GPRS/EDGE networks by the end of 2002. Will begin deployments of W-CDMA in 2003, finishing in 2004

Sprint PCS Nationwide 1X network by mid 2002

VoiceStream Wireless Launched a nationwide GPRS network in November under the brand iStream

Source: Company information