Profits of Doom?

After eight years of Clinton-esque praise for a growing economy, the newly elected Bush administration pierced the glow with warnings of a sputtering economy and an imminent recession. The mood of this country's citizens is decidedly more pessimistic, and they seem to be bracing for tough times ahead. In doing so, spending is down and growth is slowing.

In light of this, carriers have submitted their fourth-quarter earnings. In most cases, the results were surprisingly strong.

Sprint PCS said its revenue increased 84% from the previous year, and it added 1.25 million new subscribers.

Verizon Wireless, across all of its divisions, posted strong growth with 63 per diluted share and a net income of $1.7 billion over the same period in 1999 for an 11.1% increase in 2000.

SBC Communications reported that contributions from Cingular Wireless, continued strong growth in data services, and the first full quarter of long-distance service in Texas combined to fuel its growth. Fourth-quarter revenues, including proportionate Cingular results, increased 9.1% to $14.1 billion.

Cingular Interactive, formerly BellSouth Wireless Data, closed the year 2000 with more than 570,000 subscribers on its nationwide network, doubling its growth over last year.

U.S. Cellular generated 12% growth in service revenues and 13% growth in operating cash flow. Operating results included 171,000 net customer additions, a 15% increase over the previous year; a $45 million increase in service revenues to $421.3 million; and a $13.2 million increase in operating cash flow to $113 million.

Yet, in spite of reasonable growth and profits last quarter, carriers are preparing analysts for a less-than-buoyant first quarter in 2001. They suggest that the economic slowdown could send ripple effects across the wireless industry. There could be some basis to this, but then again, it could be a spoonful of reality to help future tough numbers go down. Times indeed could get tough. Already, major handset vendors - Ericsson, Motorola and Nokia - have signaled that they can't keep their manufacturing plants open and meet their own profit goals. In the face of sluggish sales and evaporating profit margins, they are allowing other companies to handle their manufacturing.

In Sprint's fourth-quarter report, the CFO left the door open for good or bad performance by saying the economy's effect on the wireless industry was "any-body's guess."

As I qualify as an anybody, here's my inside guess. Carriers' packaged minutes will protect them. Although consumers may be more watchful of their usage, they will not discontinue services. If Craig Consumer has 500 minutes of use for a month, he'll continue to use them and pay the monthly fee. He won't opt out of the service. The existing subscriber base will remain strong.

As for new subscriber sign-ups, they may not soar as in past quarterly performances, but they will remain strong, carried by the momentum of a utility that has found its stride.

Although the wireless Web has been slow against overly optimistic expectations, it's likely to remain steady as opposed to explosive over the next quarter. This could be a blessing in disguise for carriers who need some breathing room. They will have more time to upgrade their networks and improve overall coverage and performance.

Finally, if in the new year, the country does sink into a recession, it would be foolhardy to believe consumers won't become more discretionary with their spending. However, if they look for ways to cut their personal expenditures, landline service vs. wireless expenses will come into question. At that point, wireless carriers need to launch an all-out offensive designed to convince subscribers that wireless best meets and fulfills all of their needs.