VOICESTREAM/CINGULAR LINK ONLY A SHORT-TERM FIX

VoiceStream Wireless and Cingular Wireless cited long-term savings as the driving force for the 50/50 infrastructure joint venture they announced last week, but analysts noted that the agreement is structured so the companies can exit the deal easily in the future.

Because the carriers are not relinquishing spectrum licenses or operating control of their networks as part of the deal, they may walk away if the FCC lifts the spectrum cap, which would make wireless operator consolidation more viable.

“If Cingular can get to the New York market with an offering, they may try to team with another carrier down the line,” said Jason Bell, wireless analyst for SunTrust Robinson-Humphrey.

Bell is uncertain how any potential merger involving Cingular could affect the agreement with VoiceStream, but he was not alone in identifying the possibility. The fact that the joint venture does not gain possession of the spectrum could let the operators separate later without a bitter battle over the “all-important spectrum,” according to a Current Analysis report.

VoiceStream and Cingular said the venture will save them millions of dollars by allowing them to share infrastructure — and, in effect, spectrum — in markets they desperately need to enter. The venture will control 40 MHz of spectrum in New York, Los Angeles and San Francisco, with each company providing access to their existing airwaves in these markets. In other parts of California and Nevada, the venture has 30 MHz of spectrum.

The deal is effective immediately, and the operators expect to enter their respective new markets by the end of the year. VoiceStream will gain access to all of California and Nevada, while Cingular will make inroads into the critical New York market. Cingular failed to win New York spectrum in the January auction and only had access to 10 MHz there via its spectrum swap agreement with VoiceStream.

While the companies refused to disclose financial details, they maintained that the joint-venture terms are more favorable than operating separate networks. VoiceStream Chairman and CEO John Stanton estimated that VoiceStream will save more than $1 billion in the first three years of the joint venture.

“It improves our spectrum efficiency, saves us capital and increases profitability,” Stanton said. “Both companies were looking for quicker ways to enter markets and use spectrum efficiently.”

Stephen Carter, CEO of Cingular, said the venture is “innovative” and “created to last a long time.” Stanton also noted “long-standing benefits” but was less specific about how this venture would evolve in the future.

“We can't all contemplate what would happen to the joint venture if our mother companies decide to make further merger and acquisition moves,” Stanton said.

Though the prospect of removing the spectrum cap may undo the deal, the VoiceStream/Cingular joint venture may be a model for other carriers, Bell said.

“It opens the door for other carriers to look at deals like this, especially as they move into 3G arrangements.”