WIRELESS WOES INCREASE AS GROWTH RATES SLOW

Fourth-quarter subscriber numbers disappoint investors

As wireless services penetration moves above 40%, investors are punishing wireless-related stocks while U.S. carriers struggle to maintain subscriber growth rates.

The holiday season is typically the strongest in the wireless industry, yet several of the nation's largest carriers delivered fourth quarter financial results that were lower than estimates on Wall Street, resulting in falling stock prices (see figure).

Cingular Wireless' 325,000 subscriber additions in the fourth quarter — about 55% lower than what analysts expected — were the latest indication that growth is tapering. Cingular said the low numbers reported last week were a result of the company's push to purge lower revenue-generating prepaid customers and migrate analog customers to digital plans.

“It is not nearly as easy to hit subscriber numbers now because all of the low-hanging fruit is gone,” said Craig Mallitz, vice president of wireless services for Legg Mason. “Wireless investors that have been focused on subscriber growth need to move their focus to profitability. It is going to be how carriers are growing their business rather than what the actual growth is.”

Investors' fixation on quarterly subscriber gains has been frustrating to many wireless executives trying to clean their companies' balance sheets by eliminating low-profit customers. Slower growth also means higher margins.

Yet investors were hoping the U.S. wireless market within the next six years would reach the same 70% penetration levels found in developed European countries, said Tim O'Neil, vice president of Wit SoundView. Penetration in the U.S. lingers around 45%.

“People are now concerned about how carriers will ever get there with a slowdown,” he said.

Analysts predict a bumpy ride for the industry until carriers can differentiate their products based on something other than pricing, such as the high-speed wireless data services they plan to roll out during the next 18 months.

Carriers have tried to increase penetration through prepaid products. But churn rates and cost per gross addition typically increase while average revenue per user falls, making investors nervous. Several carriers saw an uptick in churn in the fourth quarter because of prepaid.

“Companies have to spell out the profitability of prepaid to help investors understand it,” said Patrick Comack, telecom analyst for Guzman & Co.

The key is to offer a prepaid product that motivates a customer to continue paying for the service, according to analysts. Many carriers penalize prepaid users by charging a premium fee, and customers often don't have access to a variety of handsets and features.

Cingular planned to relaunch its prepaid program in November but is still determining how to build customer loyalty.

Some analysts believe Sprint PCS has figured out the prepaid business. The company's ClearPay service drove subscriber growth during the last half of 2001 by offering credit-risk consumers a spending limit up to $200 instead of requiring the upfront deposit that most prepaid plans require. Unlike prepaid plans, Sprint PCS's service often involves a one-year contract, and the spending limit is maintained each month. Customers have access to the same features and phones as postpaid customers.

“If Sprint does well with this new approach to prepaid, the whole industry might benefit,” said Jason Bell, wireless analyst for SunTrust Robinson Humphrey. “Once carriers get those metrics out there, then people will be able to focus on profitability of subscribers.”

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With additional reporting by Kelly Carroll in Chicago.

Q4 subscriber additions for major U.S. carriers

	Expected	Actual	Stock change since Dec. 1, 2001
AT&T Wireless	950,000	TBA 1/29	-18.75%
Cingular Wireless	700,000	325,000	NA*
Sprint PCS	1.3 million	1.1 million	-32.78%
Verizon Wireless	900,000	715,000	NA*
VoiceStream Wireless	550,000	668,0000	-4.79%
* Carrier not publicly traded as a separate entity