The wireless growth engine

Top U.S. wireless operators continue to report strong sequential growth quarter after quarter with stable average revenue per user, churn and cost per customer—and usage continues to grow.

As such, wireless services were the driving force in fourth quarter results for some telecommunications companies that are struggling in the broadband and data markets and wrestling with falling revenues in the long-distance business.

Sprint's wireless group, Sprint PCS, helped boost the company's sagging fortunes with a strong quarter that saw revenues increase 84% from 1999 to $1.94 billion. Annual revenues were up 88% to $6.34 billion. Sprint said declining voice revenues would continue to hound the company this year as it attempts to play catch-up in the broadband and data services market.

Verizon Communications said its fourth quarter net income rose 10% amid strong demand for its wireless and data services. SBC Communications and BellSouth said their joint venture, Cingular Wireless, helped fuel their growth in the fourth quarter.

The telecommunications industry is witnessing mass-market adoption of mobile services. The Yankee Group estimates 3% of all wireless customers use wireless phones as their only phone. Mobile handsets in the United States account for 6.5% of all phone conversations, and The Yankee Group predicts that percentage will grow to 45% by 2005.

“Wireless is now a mass market service,” said S. Joey Wolff, partner of Solomon-Wolff Associates, an independent market research firm. “Not only are more consumers using it, but many are getting two or more wireless phones. In many households, it is beginning to replace regular phone service.”

The firm's recent study indicates that consumers spend more on wireless telephone service than on local, long-distance or cable/satellite services (see figure). Barring any significant economic turndown in the U.S. market, carriers are projecting equally strong growth in 2001.

AT&T Wireless, which reported an operating cash flow of $272 million and a 39% increase in revenue to $2.97 billion in the fourth quarter, expects to report service revenue in the mobility unit at the high end of the 30% to 35% range. Even if the U.S. economy slows considerably, AT&T Wireless believes it can hit the low end of that range. It also estimates operating cash flow in the mid-60% range, which the company said shows its “continued strong subscriber and revenue growth.”

Looking back at the fourth quarter

Carrier	Subscribers added in 4th quarter	Year-end subscribers
Verizon Wireless	1.2 million	27.5 million
Cingular Wireless	814,000	19.7 million
AT&T Wireless	865,000	15.7 million
Sprint PCS	1.25 million	9.85 million
Source: Company reports

Average consumer spending on telecommunications

Mobile phone service	$54
Long-distance service	$40.11
Local phone service	$37.04
Cable/satellite service	$43.66
Source: Solomon-Wolff Associates

Sprint PCS, considered the barometer for wireless growth in the industry, expects to add an additional 4 million subscribers in 2001 with operating cash flow reaching $1.6 billion or better for the year.

“If the economy does not deteriorate from here, we assume incremental penetration again reaching 8% or so,” said Arthur Krause, Sprint's chief financial officer during a conference call with analysts. “We expect ARPU will remain at current levels with the potential for modest increases.”

ARPU has continued to climb quarter over quarter for most wireless operators. Some operators expect to it to fall slightly as they begin segmenting the market.

“We believe the improvements in ARPU are a function of the ongoing substitution of wireline to wireless, which is driving usage and therefore ARPU,” read a recent Wit SoundView report.

Analysts predict slight declines in ARPU as the wireless market matures during the next two years. Carriers expect wireless data will help them to recoup those revenues.

“We are counting on wireless data to keep revenue growth going later this decade and [we're] counting on keeping mobility from being commoditized,” said Mohan Gyani, president and CEO of AT&T Wireless Services.

Data so far has had a negligible impact on revenues, representing just 0.5% of total revenue, according to The Yankee Group. Sprint PCS estimates a $100 million annualized run rate of data revenues in the fourth quarter.

A recently published report from The Strategis Group indicates mobile data will have a U.S. population penetration rate of nearly 60% by 2007, from 2% today. The firm attributes the growth to aggressive deployment of high-speed services in the United States.