2002: Who Gets Out Alive?

Look around, the face of competition is about to change. Pats on the back are in order for wireless carriers simply for surviving 2001. But if this year was rough, now comes the real test: 2002. As the economy careens toward a recession, don't bet on a recovery in the next few quarters. Consumers will pinch their spending even tighter, and carriers with heavy debt will find their stock value mired in tar. All this will force them to find new ways to survive.

If that isn't enough to drive change, the FCC has uncorked spectrum caps, a move that will drive rampant consolidation. The commission raised the urban-markets cap to 55MHz. On Jan. 1, 2003, the new urban cap and the existing 55MHz rural-market cap will disappear forever. By the end of 2002, many regional players will fold into the national carriers, and movement within the big six carriers should be apparent.

The trio of GSM carriers is the most likely to consolidate in some fashion. Synergy already exists between Cingular and VoiceStream — the two share networks and spectrum. Phil Redman, Gartner research director, said the two merging is “almost a guarantee” once the caps are lifted.

Cingular could disappear altogether, according to Andrew Seybold, Outlook 4 Mobility analyst. VoiceStream could buy Cingular's GSM properties, making VoiceStream a true national carrier. AT&T Wireless might then assume Cingular's TDMA networks.

The roles could reverse, though, as AT&T Wireless is an acquisition target now that it stands alone. Todd Rethemeier, Bear Stearns senior wireless analyst, said a merger between AT&T and Cingular would make sense for three reasons: “It would give Cingular a national footprint, which it doesn't quite have today,” he said. “Second, it would be the largest wireless company by far. Third, that technology migration (to GSM/GPRS) is potentially very expensive. If you have the two of them merging, you only have one network (to build).”

Nextel might be part of the first salvo of merger mania. A spectrum-cap report from The Strategis Group notes that Nextel has 21MHz of SMR spectrum, but only 10MHz of that spectrum is subject to the cap. Any major carrier, then, could acquire Nextel immediately and not surpass the new 55MHz cap.

Even the old caps wouldn't have hindered Sprint PCS from acquiring Nextel because Sprint only uses 30MHz in its markets. Sprint PCS wants to expand its presence aggressively within the enterprise; acquiring Nextel fulfills that ambition.

Nextel's iDEN technology, though, makes it the industry's black sheep. Nextel is sticking with iDEN for now; although, it is interested in moving to cdma2000 1X.

“Maybe Verizon Wireless or Sprint PCS backed off their interest, so Nextel didn't see much benefit in the short term to go that direction (cdma2000 1X),” Redman said.

A merger between the two largest CDMA carriers would keep pace with GSM mergers and free Verizon Wireless from foreign ownership, if relations with Vodafone worsen.

“Say Verizon Wireless buys Sprint PCS, they could say 'bye to Vodafone,” said Roger Entner, Yankee Group program manager, wireless mobile services.

Verizon's recent acquisitions demonstrate a focus on filling gaps in its nearly pervasive coverage. The carrier recently purchased four markets from Dobson Cellular, covering 950,000 POPs. Rumors also have Verizon buying CenturyTel's wireless unit.

With the big getting bigger, the remaining carriers may find unity is the best way to survive.

“Eventually, I can see where U.S. Cellular, Dobson, maybe even Western Wireless merge to help decrease some of their infrastructure and terminal costs,” Redman said.

Alltel's ambition to become the dominant rural carrier won't end with CenturyTel's rejection. A possible Alltel acquisition includes Qwest Wireless, according to Entner.

Top 10 Metrics

The following top 10 U.S. wireless carriers list was compiled from information supplied by the individual carriers.

Wireless carriers are ranked based on subscriber numbers as of 3Q01. Subscriber numbers are domestic only and do not include affiliates.

Next-generation technologies refer to the carrier's initial step toward 3G. EBITDA figures are through nine months, ending Sept. 30, and are only for wireless operations. Fifty-two-week stock high and low prices are as of Nov. 1.

verizon wireless

After being on hold for more than a year, it appears a Verizon Wireless IPO will happen early in 2002. The lead hunter for NextWave's spectrum, Verizon will use the cash from that IPO toward the billions it will take to end the NextWave soap opera. Originally delayed due to poor market conditions, the IPO has been in limbo while the economy went from pitiable to paltry. Being the nation's No. 1 wireless carrier, though, comes with clout, which will help get whatever needed funds the IPO doesn't raise.

“If you are the No. 1 wireless carrier, you have no problem going to the bond market and saying ‘I need $5 billion,’” said Roger Entner, Yankee Group program manager, wireless mobile services. “An IPO would be nice, but they can raise the money (for the settlement) without it.”

For the third quarter, Verizon added 752,000 subscribers, second only to Sprint PCS' record net adds. Verizon's 3Q01 ARPU came to $49, the fifth consecutive quarter of year-over-year growth, but still several dollars behind its nearest competitors.

Of the carrier's subscriber base, 69%, or 20 million, are digital. Migrating nearly 9 million more subscribers from analog to digital will be a costly undertaking for Verizon, according to Craig Mallitz, Legg Mason associate analyst, wireless services.

As Verizon Wireless launches more 1XRTT markets, it will be interesting to see whether Verizon and Vodafone can agree to disagree peacefully on 3G destinations.

“Right now there isn't a story, but everybody knows it's an uneasy relationship,” Entner said.

“They are both challenged and distracted right now by developing their own markets,” Phil Redman, Gartner research director, added. “It may be not be for five to 10 years that the synergy is there.”

2000 Rank: 1
Subscribers: 28.682 million
Service: National
POPs: 248 million
Churn: 2.2%
Technology: CDMA 800MHz & 1.9GHz
Next-Generation Technology: 1XRTT
EBITDA: $4.606 billion
CFO: Ted Langston
Ticker Symbol: VZ (parent company; NYSE)
Employees: 40,000
Slogan: Simple, national, affordable. Join In.

cingular WIRELESS

Cingular's third-quarter net additions were low enough to dampen even its friendly brand. The carrier added 95,000 subscribers, abysmal compared to AT&T Wireless' 748,000, Verizon Wireless' 752,000 and Sprint PCS' 1.2 million.

“They had gross adds of about half a million, but they deliberately cut off a lot of prepaid customers in a quest to go after high- ARPU customers,” said Yankee Group's Entner. Cingular's 3Q01 ARPU came to $53.26, higher than Verizon's $49, but lower than AT&T's $63.60 and Sprint's $62.

“Cingular had a lot of subscribers that had less than $10 ARPU a month, and that was depressing their numbers,” Entner said. “They added almost a dollar in ARPU by killing those low-usage subscribers.”

Cingular's 4Q01 numbers will prove whether the 3Q01 net adds were a fluke or a trend. If net adds spike back up, 3Q01 could be Cingular's house-cleaning quarter.

If Cingular doesn't do well in the fourth quarter, its 3G-technology choice will be even more appropriate.

“EDGE is like the poor man's 3G,” Entner said. “If you don't have the money or the spectrum, you do EDGE. You save money because it's only an overlay, but you are falling short of what real 3G can do.”

The problem with EDGE, Entner added, is that at most, five carriers worldwide will use EDGE. That means higher costs for carrier and consumer.

“Compared to GSM and UMTS, the consumer choices will not be as many, and they will probably have to pay more,” Entner said.

2000 Rank: 2
Subscribers: 21.279 million
Service: National
POPs: 211 million
Churn: Non-disclosed
Technology: GSM 1.9GHz, TDMA 800MHz & 1.9GHz
Next-Generation Technology: GPRS
EBITDA: $3.457 billion
CFO: Rick Lindner
Ticker Symbol: BLS & SBC (parent companies; NYSE)
Employees: 35,000
Slogan: What do you have to say?

AT&T Wireless

AT&T Wireless has the least debt in the industry, said Todd Rethemeier, Bear Stearns senior wireless analyst. That balance sheet will be needed to support the carrier's expensive GSM/GPRS overlay.

“It's certainly a more difficult and potentially more expensive migration than other carriers face, but they may not have any other choice — they're TDMA,” Rethemeier said.

Two of AT&T's main competitors, Sprint PCS and Verizon Wireless, have more cost-effective paths to enhanced services, which will prove to be an early challenge for AT&T's GPRS services.

“Sprint and Verizon double their voice capacity (with 1XRTT), whereas AT&T doesn't see any increase in voice capacity from launching GSM and GPRS,” Gartner's Redman said. “They are not going to be able to offer pricing as low in order to profit as high as Sprint and Verizon.”

Judging by its reputation in some markets, AT&T is going to need to find a way to improve voice coverage before it offers high-speed data.

“Their network capacity in some markets is not adequate,” Rethemeier said. “In New York, they certainly have the reputation for having lousy service. Los Angeles is similar.”

Now completely independent from AT&T, AT&T Wireless is free from the parent company taking some of its cash flow. The new challenge will be to operate independently and to innovate beyond Bell thinking.

“It's tough because the new management is still legacy,” Redman said. “I wouldn't be surprised to see some organizational changes and some fresh new outlooks on the marketplace from AT&T.”

2000 Rank: 3
Subscribers: 17.120 million
Service: National
POPs: 165 million
Churn: 3.1%
Technology: GSM 1.9GHz, TDMA 850MHz & 1.9GHz
Next-Generation Technology:GPRS
EBITDA: $2.449 billion
CFO: Joe McCabe
Ticker Symbol: AWE (NYSE)
52-Week Stock High: $27.30 (2/2/2001) Low: $12.27 (9/7/2001)
Employees: 29,000
Slogan: Your World Close at Hand

Sprint PCS^®

Sprint PCS added 1.2 million subscribers in the third quarter, a phenomenal figure that represents more than 30% of the net adds of the big six carriers, according to Legg Mason's Mallitz. The carrier's Clear Pay plan, which helps consumers with marginal credit get traditional postpaid wireless service, accounted for 70% of those net adds. It remains to be seen what those subscribers will do to the carrier's churn.

Regardless, 3Q01 was the 13^th consecutive quarter Sprint PCS led the industry in customer growth. Bear Stearns' Rethemeier said the Sprint brand name is a major part of the carrier's success.

“People remember the pin-drop ads, and Sprint PCS has done a very good job with extending the brand name to wireless,” he said.

Mallitz agreed, saying the carrier has the most recognizable name in wireless. But even at Sprint's pace, it will have a hard time catching Verizon Wireless and Cingular, carriers that launched several years before Sprint. Sprint can, however, measure success by taking their subscribers.

“They would claim victory by continually taking market share from the larger carriers, as well as not having to spend huge amounts of money to do multiple network overlays,” Mallitz said.

Sprint's youth, though, hampers its coverage quality.

“Business users, although they are mostly happy with the quality of voice service, are not happy with the coverage,” Gartner's Redman said. “Generally, those who leave Sprint have all said that coverage is the biggest reason why, because 20% to 25% of the time, they can't get a connection or the calls drop.”

2000 Rank: 4
Subscribers: 12.441 million
Service: National
POPs: 244 million
Churn: 2.6%
Technology: CDMA 1.9GHz
Next-Generation Technology: 1XRTT
EBITDA: $1.146 billion
CFO: Bill Gunter
Ticker Symbol: PCS (NYSE)
52-Week Stock High: $38.44 (11/1/2000) Low: $15.72 (3/22/2001)
Employees: 30,000
Slogan: The Clear Alternative to Cellular

Top 10 Carriers' Subscriber Net Additions

	3Q00	3Q01
Verizon Wireless	806,000	752,000
Cingular	723,000	95,000
AT&T Wireless	750,000	748,000
Sprint PCS	839,000	1,243,000
Nextel	540,400	481,200
Alltel	115,647	124,273
VoiceStream	501,200	370,000
U.S. Cellular	107,000	85,000
Western Wireless	46,000	41,000
Qwest Wireless	38,000	69,000

NEXTEL

Nextel's decision to upgrade its iDEN network rather than migrate to CDMA technology was “a very good tactical move and a very poor strategic move,” according to Legg Mason's Mallitz. Given the carrier has the industry's worst debt levels and market conditions, funding a move to 1XRTT would have been risky. The problem is that Nextel could be at a competitive disadvantage against other carriers' enhanced offerings.

“The flip side of that would be that if 3G is a flop, these guys have made a great bet,” Mallitz said.

The decision also keeps Nextel isolated from other carriers in terms of its technology and business focus: small and medium-sized enterprises. With 70% penetration in its enterprise space, some argue that Nextel is approaching a subscriber ceiling.

“They are very content to continually generate subscribers from other carriers,” Mallitz said. “Almost every quarter, Nextel says 30% or so of their adds come from other carriers. That's a difficult strategy because it can change in a heartbeat, but that's where they are going.”

Nextel's debt has plagued its stock value, part of the reason for its 52-week low in early October. For the foreseeable future, though, the carrier isn't in danger of running out of cash.

“They do have almost $4.2 billion in cash on the balance sheet and another $1.5 billion available to them on a credit facility,” Bear Stearns' Rethemeier said. “That $5.7 billion will carry them for many more quarters before they would need additional funding.”

2000 Rank: 5
Subscribers: 8.17 million
Service: National
POPs: 230 million
Churn: 2.1%
Technology: iDEN 800MHz, SMR
Next-Generation Technology: iDEN upgrade
EBITDA: $1.327 billion
CFO: Paul Saleh
Ticker Symbol: NXTL (NASDAQ)
52-Week Stock High: $38.63 (1/31/2001)
Low: $6.87 (10/2/2001)
Employees: 16,500
Slogan: How Business Gets Done

ALLTEL

Alltel is a victim of its own success in that it has tapped out its home area, according to Yankee Group's Entner.

“They are hampered by their regional coverage,” he said. “They gained 124,000 subscribers, and VoiceStream, which is comparable, added 370,000. They just can't grow.”

Acquisitions will be Alltel's ticket into new markets, but it will have to beat others in gathering regional carriers. Alltel's infamous pursuit of CenturyTel is on hold for the time being. CenturyTel's reluctance, though, may change as the economy continues its slide.

“Next year as things start shaking out more, and as subscriber adoption potentially plateaus, then there might be some changes of mind,” Gartner's Redman said.

2000 Rank: 6
Subscribers: 6.587 million
Service: Midwest, Southeast & Southwest
POPs: 49.5 million
Churn: 2.42%
Technology: CDMA 800MHz
Next-Generation Technology: 1XRTT
EBITDA: $1.027 billion
CFO: Jeffery Gardner
Ticker Symbol: AT (NYSE)
Slogan: Are You Connected?

VoiceStream

VoiceStream has an excellent spectrum position, nearly as good as Sprint PCS', according to Bear Stearns' Rethemeier. The carrier also has excess capacity, added Legg Mason's Mallitz.

“They can be the lowball price guy in the market because they have so much excess capacity; they can offer big-minute rate plans,” he said. “(Although) these are not juicy customers, they get the middle tier to lower tier.”

As the most widespread GSM carrier, VoiceStream's network may be advantageous as U.S. GSM adoption increases. The carrier already has a roaming agreement with Cingular and could strike an additional one with AT&T Wireless.

Deutsche Telekom's (DT) purchase of VoiceStream brought an infusion of capital that will help the carrier launch service for its remaining uncovered POPs. With U.S. GSM competition heating up, DT eventually might sell the carrier if it does not pull its weight.

“DT well overpaid for VoiceStream in the first place, and DT couldn't just dump VoiceStream at this particular point in time, but operationally VoiceStream has been under-performing; they are falling in the bottom tier of almost every operating metric,” Mallitz said.

2000 Rank: 7
Subscribers: 6.3 million
Service: National
POPs: 273 million
Churn: Non disclosed
Technology: GSM 1.9GHz
Next-Generation Technology: GPRS
EBITDA: -$95 million (3Q01 only)
Executive Vice President — Finance, Strategy & Development: Cregg Baumbaugh
Ticker Symbol: DT (parent company; NYSE)
Employees: 17,500
Slogan: Get More From Life

U.S. Cellular

With service in three regions using two digital technologies, U.S. Cellular lacks cohesiveness.

“They've said they want to focus on their Midwest cluster and build around it either through swaps or by selling some of their other areas and buying some that are closer to the Midwest area,” Bear Stearns' Rethemeier said. “You can judge for yourself whether they've done anything on that strategy or not.”

Despite their disparity, the markets have quality that could attract attention.

“If they wanted to put themselves up for sale, there would be interest from several different companies for several of the markets, if not all of them,” Rethemeier said.

The carrier has established good coverage in those markets.

“I occasionally recommend them to corporate users who have offices in a small market because these guys provide the best coverage there,” Gartner's Redman said.

2000 Rank: 8
Subscribers: 3.379 million
Service: East, Midwest and Northwest
POPs: 26.686 million
Churn: 2.1%
Technology: CDMA 800MHz; TDMA 800MHz)
Next-Generation Technology: N/A
EBITDA: $466.4 million
CFO: Ken Meyers
Ticker Symbol: USM (AMEX)
52-Week Stock High: $68.57 (2/13/2001)
Low: $40.70 (10/16/2001)
Employees: 5,150
Slogan: We connect with you

Western Wireless

Western Wireless is the “Switzerland of roaming,” according to Legg Mason's Mallitz. Traditionally an analog provider, the carrier uses TDMA, has upgraded 40% of its network to CDMA and also is considering deploying GSM.

That migration to digital service hasn't been easy. In 2Q01, the carrier hadn't launched enough digital markets and lost market share to digital competitors, Bear Stearns' Rethemeier said.

Western Wireless' international unit has gone into “countries you would never want to go to on vacation … civil wars were going on in their countries,” Rethemeier said. Providing wireless to telecom-thirsty areas has made for quick profits. In Latvia, the carrier invested less than $10 million, operated for four years, and then sold the business for $70 million.

Now, however, the international unit may be taking capital away from domestic operations.

“Their international properties are becoming bigger and are taking more investments to build than they used to,” Rethemeier said.

2000 Rank: 9
Subscribers: 1.157 million
Service: Western
POPs: 9.8 million
Churn: 2.5%
Technology: CDMA& TDMA 800MHz
Next-Generation Technology: 1XRTT
EBITDA: $271.4 million
Executive Vice President of Finance: Theresa Gillespie
Ticker Symbol: WWCA (NASDAQ)
52-Week Stock High: $49.75 (2/15/2001)
Low: $27.28 (10/30/2001)
Employees: 3,665
Slogan: Let's talk …

Qwest

Qwest Wireless' success has its roots in bundling wireless with the parent company's other services. The carrier's major challenge, though, is it has the “dry bread crumbs when it comes to territory,” according to the Yankee Group's Entner. Qwest has gem markets such as Denver, Phoenix, Salt Lake City and St. Paul, MN, but beyond that, it has “vast arrays of wasteland” where it is difficult to make a profit, especially with increasing competition from large carriers, Entner said.

Qwest could gain differentiation from rural competitors as it is “looking at spending decent money to provide digital service where others have avoided it,” Redman said.

2000 Rank: 13
Subscribers: 1.071 million
Service: Western
POPs: 26.4 million
Churn: Non-disclosed
Technology: CDMA 1.9GHz
Next-Generation Technology: 1XRTT
EBITDA: Wireless only non-disclosed
CFO: Robin R. Szeliga
Ticker Symbol: Q (parent company; NYSE)
Slogan: Ride the Light

Top Carriers in Canada

Bell Mobility
Subscribers: 3.2 million
Rogers AT&T Wireless
Subscribers: 2.8 million
Telus Mobility
Subscribers: 2.42 million
Microcell
Subscribers: 1.108 million