WIRELESS GROWTH SLOWDOWN SPARKS FEARS OF PRICING WARS

Alltel, Sprint PCS and Verizon Wireless stocks take more beatings

Wireless carrier stocks took another beating last week as Sprint PCS — the industry leader in subscriber additions for 14 consecutive quarters — confirmed investors' fears that wireless growth is slowing and raised concerns of an industrywide pricing war.

Sprint PCS's stock fell 20.1% after the company said it expects to add 3 million subscribers in 2002 instead of the 3.7 million it had projected. The company added about 4 million new customers in 2001.

“At a recent analyst meeting, we noted that our estimates for growth for 2002 were based on what was then the consensus incremental industry penetration of about 22 million new users,” said Art Krause, executive vice president and chief financial officer for Sprint. “It's no secret that this consensus has moved down dramatically and is now closer to 17 million.”

Such a downward projection mimicked by other major wireless operators has investors fearing intense price wars that could erode EBITDA margins and cause carriers' average revenue per user (ARPU) to decline.

“There is definite fear that there will be a pricing war because of economic conditions,” said Jason Bell, wireless analyst for SunTrust Robinson Humphrey. “The theory is that the market is saturated. To maintain subscriber growth, you have to take from other carriers, and that's going to lead to competition on the price front.”

Last week, Verizon Wireless and Alltel may have touched off a new round of pricing wars with their introductions of new one-rate nationwide plans that lower the bar to attract general consumers. The plans — ranging from $35 for 300 minutes to $200 for 2000 minutes — likely will spur other carriers to re-evaluate their national one-rate calling plans to seek new growth in consumer and business segments, said Jeffrey Rickard, wireless analyst for Current Analysis.

“Alltel's new calling plans may be the start of a heavy and harsh price war as the major carriers battle to retain and add subscribers,” Rickard wrote in a recent report. “As such, this will lead to greater churn rates and a drop in ARPU throughout the industry.”

Sprint PCS President Charles Levine told analysts he is prepared for more aggressive pricing in the coming months.

“Hopefully, they'll be rational about pricing and will continue to price at a level that allows us to continue to increase our EBITDA and continue to increase our profitability,” he said. “But I would not be surprised if people continued to be aggressive. We've seen some folks offering a huge number of minutes at fixed pricing.”

If carriers thought they could benefit from more aggressive pricing, they would have adjusted them more severely by now, some analysts said. The economy began faltering early last year, but pricing decreased by just 7.3% in 2001, according to Econ One Research, a firm that tracks wireless services pricing trends.

“Carriers feel they have a competitively priced product already,” said Charles Mahla, senior economist for Econ One. “It's late for that strategy now that the economy is starting an upturn or at least bottoming out…. What you might get in lieu of changes in pricing might be interesting promotions that appear to be more price competitive but don't alter pricing that much.”

Rickard suggests carriers should try to attract new subscribers by bundling add-ons such as extended warranties, off-peak minutes, blocks of roaming minutes or family plans to standard services packages rather than aggressively decrease per-minute pricing.

The fear of a pricing war is exacerbated by the fact that many investors don't believe next-generation services like CDMA 1XRTT and GPRS will catalyze growth this year, despite Sprint PCS's move to launch 1X nationwide by midyear. Carriers will be at the beginning of their marketing pushes, and adoption of services aren't expected to ramp up until 2003.

“Can we reach more than 17 million subscribers in 2002? It depends on the second half and how the economy turns around,” said Tole Hart, senior analyst for Gartner Dataquest. “I don't think [next-gen systems] will be much of a factor this year. The year 2003 will be more of a driver.”

SunTrust's Bell believes simple supply-and-demand factors will keep wireless carriers financially healthy throughout a troubled economy. Unlike the wireline industry, demand for capacity exceeds the supply, which ultimately maintains healthier ARPUs.

“The market is sending messages that [aggressive pricing] is not going to be rewarded,” he said.