WIRELESS SECTOR DESCENDS INTO BATTLE OVER PRICING

Wireless carriers are quickly abandoning their pledges to focus on increased average revenue per user in favor adding raw numbers of customers. AT&T Wireless Services and Cingular Wireless spurred a new round of pricing wars in recent weeks as the companies work to aggressively fill up their new GSM/GPRS networks.

Cingular has not yet officially turned up its GSM network, but the company already is pushing new handsets that will allows users to access their TDMA and their GSM networks, according to a company spokeswoman.

“The story is about AT&T Wireless and Cingular trying to move minutes onto their GSM networks,” said Sean Butson, principal with Legg Mason. “They have to reduce roaming expenses and reduce capex on their TDMA networks. The faster they can migrate the traffic, the less they have to spend on TDMA.”

The pressure is on. AT&T Wireless and Cingular Wireless continue to spend a large portion of their capital expenditures on increasing capacity and building out their TDMA networks. Given the softness of the wireless market over the last six months and the intense competition among the major national players, all carriers are looking to prudently manage capex in 2003.

The capex budget of AT&T Wireless has even become a concern for credit rating agencies. The company anticipates spending about $5.3 billion this year as it completes its GSM/GPRS buildout. Cingular Wireless reduced its capex guidance for 2002 by about $1 billion to between $4.2 billion and $4.6 billion, saying it will look to conserve money by squeezing vendors as well as through TDMA market conservation.

“We spent a lot of money developing our [GSM] network, and it only makes good business sense to populate that as fast as possible with minutes,” said an AT&T Wireless spokesman.

As long as customers stay on AT&T Wireless' GSM network — which covers about 70% of its potential customers nationwide — they can pay as much as $35 for 1000 anytime local and long-distance minutes, and $100 for unlimited minutes. These plans now make AT&T Wireless the low-cost carrier in each of its respective national on-network plans, analysts noted. AT&T Wireless is essentially offering service for 4¢ per minute.

Although Cingular raised prices on some of its national plans in August, it began emphasizing regional rates and instituted a new option that allows customers to roll over their minutes from month to month. Cingular is offering more aggressive regional pricing on its GSM/GPRS network than its TDMA system, Butson noted.

And unbeknownst to many, Sprint PCS has also entered this new pricing game. One of its more aggressive plans includes 2000 anytime minutes with two megabits of data for $90. Ned Zachar, partner with Thomas Weisel Partners, noted that the offerings from both AT&T Wireless and Sprint PCS are setting a new low mark for the wireless industry.

“The gloves are off,” said Zachar. “In our view, these promotions will likely force competitors to respond.”

Such pricing could force the country's largest carrier, Verizon Wireless, the leader in subscriber additions for the second quarter, to change its plans. The company's success over the last few quarters has come in part by providing a clearer marketing message that it's network quality is better than its competitors, lowering its credit requirements and offering more competitive entry-level pricing plans.

Still, Charles Mahla, senior economist with Econ One, a research firm that tracks wireless pricing trends, said carriers know pricing wars aren't in the industry's best interest. Lower prices put pressure on ARPU, and carriers are incrementally doing a better job of differentiating themselves, he said.

“It's about price and some differentiation,” said Mahla. “Verizon is showing that it's working. That's a move away from being the cheapest guy on the block.”

Jeffrey Rickard, a wireless analyst with Current Analysis, said in a recent research report that competing carriers could look to ride the pricing changes out, choosing to focus instead on the weaknesses of competitors — such as the fact that AT&T Wireless still has limited coverage with its GSM network.

The fear among some analysts is that a pricing war started by GSM-based carriers could be finished by those building out with cdma2000. Indeed, Ovum is predicting that U.S. carriers will not have any significant W-CDMA deployments by 2005.

“Sprint and Verizon could hypothetically build out their 1X networks just to handle voice and then launch a price war to kill their TDMA/GSM brethren, who just incurred massive network buildout costs,” said Michael Doherty, wireless analyst with Ovum. “Spring could kick off a price war coupling discounted voice minutes with cheap data offerings.”

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With additional reporting by Kevin Fitchard in Chicago.