Stanton's Rural Plus

In the quest for ubiquitous coverage, there are large markets and small markets. Large markets such as New York and Los Angeles hold the rich promise of hundreds of thousands of customers automatically chewing up the same in minutes of airtime. Small markets, particularly rural markets such as Boise, ID, and El Paso, TX, don't seem to hold that same readily apparent promise.

However, geography proves there are far more small, rural markets than there are super cities. And John Stanton, Western Wireless chairman & CEO, wants to tap the rich potential by serving lots of smaller markets rather than a few huge ones. Small markets have been Stanton's hallmark. First, as COO and vice chairman of McCaw Cellular Communications, Stanton went to school on the small-market proposition shoulder to shoulder with Craig McCaw.

In the 1980s, McCaw dismayed many by gobbling up small undesirable markets, leaving some wondering if he had lost his mind. Why would anyone want those hinterland locations where individual customers lived miles apart? Later, he was labeled "brilliant" when he parlayed this business strategy into a record-breaking $4.2 billion buyout from AT&T Wireless.

After the AT&T Wireless deal commenced, Stanton, who had co-founded two other cellular operations -- General Cellular and Pacific Northwest Cellular -- decided to recreate the same strategy with his own company. Western Wireless emerged from the 1994 pairing of those two cellular companies. The scrappy company started off with 89 rural markets in 17 western states.

A year later, Stanton and his team set up VoiceStream, a subsequently spun-off subsidiary, to acquire PCS licenses. During the PCS auctions, VoiceStream picked up an additional 23 markets in 13 states. Western Wireless now owns cellular and PCS properties covering 59% of the United States.

Stanton is upping this percentage. He has established a partnership with Cook Inlet, an investment group, in which Western Wireless holds a 49.9% share. With this relationship, Western Wireless won 28 additional markets C-block re-auctions for a net of $192,254,957. Of the licenses, Chicago and Dallas were the largest. According to Bo Fifer, BT Alex analyst, these two licenses will fill "major holes" in the Western Wireless network.

With his remaining acquisitions -- ranging from Aberdeen, SD, to Longview, TX, to Poplar Bluff, MO -- Stanton seemed to be recreating his Rural Plus strategy: Get more for less.

He targets second- and third-tier markets, acquires licenses for a moderate fee, uses capital investment judiciously to build the business away from the glare of the multicompetitor spotlight and adds subscribers as fast as possible.

"The rural business is a better place to be than in the urban business, not because of the number of competitors but because of the fundamental utility of the product," Stanton said. "A rural customer is someone who is always a long way from a pay phone and spends more time in their car than an urban customer ever does."

Maybe the rural markets lack the obvious cha-ching of major markets. But Stanton claims it is all in how you add it up. He said both Western Wireless and VoiceStream grew faster than any of their competitors last year.

"If you think of it in product life-cycle terms, there is a point at which the second derivative shifts from positive to negative on the growth curve. That is the point at which your rate of growth is slowing. The most economic way of creating market share is to acquire it during the most rapid growth of the business."

According to Stanton, that time is now. He takes pride in this economic story because there was a time when carriers were pooh-poohing any opportunity or economic viability in small markets. Some carriers were even returning rural licenses with a "No, thanks" to the FCC.

"They got them for free, and they were returning them," Stanton exclaimed.

However, Western Wireless saw the opportunity. Sure, there were fewer potential subscribers per square mile. But Stanton viewed each of those subscribers as a strong revenue stream in its own right. These subscribers represented multiples of miles to drive and many more minutes in their cars without leaving their regions.

"Most Americans don't travel a long way from their homes on a regular basis," he said. "They make primarily local calls, not long-distance calls."

According to Stanton, AT&T Wireless' Digital One Rate and other "clone" national coverages cater to urban dwellers who travel for business or pleasure around the United States. Stanton argued that the majority of Americans don't travel far from home on a regular basis. They just want the ability to make local calls to improve their standards of living and productivity.

"Our customer base represents a wonderful sample," Stanton said. "Less than 4% of our customers' usage in our PCS business is long distance. Less than 1% of it is roaming. We are selling into customer segments where they discount the value of that."

Although Stanton's customers don't typically roam or call long distance, other carriers' customers may, particularly some of those urban travelers. Here's another plus for the rural network.

"Our rural business fulfills the need for roaming for a variety of networks," he said. "We fulfill for CDMA, TDMA and GSM networks. We are able to preclude the need for huge capital expenditures that 1,900MHz operators would need to build rural areas. Over the long term, we can get a disproportionate share of that business and, therefore in the long run, a disproportionate value because we are not only serving the local customers but a large percentage of the roaming customers."

STAND & DELIVERJust because the network serves largely rural customers doesn't mean Stanton has small visions. He is convinced that wireless will replace wireline. As a matter of fact, he told about 30,000 of his closest friends so at the Wireless 1999 convention. During the opening general session, Tom Wheeler, CTIA president, asked panelists if wireless would overtake its wired brethren. Ivan Seidenberg and Earle Mauldin from the wired Bell Atlantic and BellSouth, respectively, said, "No way." AirTouch's Sam Ginn and Stanton who represented pure-play wireless companies said, "For sure." AT&T Wireless' Dan Hesse, whom Stanton sees "in the middle, strategically," said, "Maybe."

Stanton said wireless companies view the replacement as a green field opportunity, while wired companies view it as a defensive operation.

"I don't think you ever succeed in the long run if you view something as a defensive strategy," he said. "We are purely on the offensive in that war. And it is a hell of a lot easier to win that kind of battle."

He said industry carriers and manufacturers have a common vested interest in driving an enormous amount of usage through the systems. This includes increased availability and familiarity, improved pricing packages, and fewer of what he calls the "uglies," such as surprise roaming charges and sticker shock associated with bills where subscribers have cheap access but high per-minute charges.

"That is part of the replacement cycle of the wired network," he said.

According to Stanton, 20 years from now, most people will view wireless as their primary means of communications. It may somehow be related to or connected to the wired network, but for the most part, subscribers will use the wireless network for voice, while they use the wired network for data, Internet and multimedia services. With that said, wireless will continue to evolve and displace wired even then by taking a part of the multimedia "market share of minutes and market share of mind."

"Even though the business is now 15 years old, we are on the ground floor, or the first or second floor, of creating an exciting piece of 21st century infrastructure," Stanton said.

FEATURE ENHANCEMENTSFor a dominantly rural market whose customers predominantly use voice -- data, the Internet and multimedia seem a long way off. By Stanton's estimates, data is not 1% of his business, even though he has been hearing that it would account for more than half of it for the last 15 years.

"Data doesn't represent the panacea from a financial point of view that would justify the capital investment people are talking about," he said.

He admitted that high-speed data and multimedia will play an increasingly important role with some customers, perhaps in those other markets.

"I am not prepared to make the kinds of investments on enormous future applications that will jeopardize my ability to continue to provide great service to my customers," Stanton said. "Every carrier, whether you are AT&T or a guy who has a small RSA in the Rocky Mountains, makes a decision on how to allocate capital."

According to Stanton, those allocations are there to provide capacity for current customers, improve coverage for current customers and provide new service applications.

"The more money that you weigh toward the future new-service applications, the more challenging your problems with respect to coverage and capacity-related issues," he said.

He uses the same business formula when considering 3G, what he prefers to call "the next generation" of wireless technology.

"It doesn't serve my customers well to have to make billions of dollars worth of additional infrastructure investment that I have to get a recovery on in order to serve them," he said. "Fundamentally, my current customers are going to pay for what we hope our new customers will use."

He maintained that the drive for 3G will come from the top 10 to 20 markets. He said the focus is more on capacity, not on services that will enrich the lives of the majority of rural America immediately.

"We need to continue to focus on solutions that balance the need for expanded services, greater multimedia data applications, with the need to continue to be able to provide basic voice on an affordable basis."

Stanton is far more gung-ho about the recent GSM and TDMA convergence. He sees it allowing graceful transitions and backward compatibility for existing infrastructure and handset investment.

LEAP FORWARDWith the need to increase capacity and add services a long way off, would it be possible to leapfrog digital altogether in some of the rural markets that he serves?

"That would be economical, which is what you have to do in rural areas. You have to find ways to do things smarter in order to more effectively use your capital."

According to Stanton, people think of analog monolithically. However, Western Wireless introduced analog services into its systems based on the third iteration of the analog products. By the time it introduced TDMA, it was plug and play. Although there is some TDMA digital available in a handful of his markets, Stanton said he won't need digital for capacity.

"If we provide big bucket packages to every man, woman and child in our rural areas, we still could do most of that with analog," he said.

Without the compelling need to move to 2G, there may be enough time for a 3G technology to get proved out for rural markets. That may mean that Stanton can skip 2G in terms of the voice network and go for the feature enhancements of 3G.

ADD-ON PROJECTIONSAt each stage of the business, Stanton looks into the future and tries to measure the opportunity. He has created or reviewed 1,000 sets of 10-year projections since the first ones he did for a wireless business in December 1979.

"The only thing that has been uniformly true is we have always underestimated the amount of growth that the business would experience in subscribers, revenue and cash flow," Stanton said. "And I hope I continue to do that."

Terry Benz, Western Wireless executive director of Cellular Technology and Operations, knows a thing or two about building cellular systems. He has worked for large and small carriers from McCaw to AirTouch to Western Wireless. And he knows about small-market economics.

On the day of the interview, Benz had just put in a cell site in Montana. It covers 2,600 square miles.

"That is the way I have to build it because underneath that one cell site, there is probably half as many POPs as there is in any neighborhood in L.A.," he said. " We have to do things in design to make sure we cover as much as we can because it is fairly expensive to build a cell site."

Benz tells the story of when he was working at McCaw, and John Stanton insisted that he put a cell site in Spokane, WA, which is considered a rural market. He put the site in and backhauled it to Seattle for switching.

"It was the biggest money-making cell site we had in the whole system," Benz said. "Of all of the other 35 cell sites, it brought in more revenue."

According to Benz, that's why Stanton started Western Wireless. He saw there was a pent-up demand from rural America for mobile services.

"The revenue per transmit radio is probably better than it is in the top 20 markets," he said. "When I worked in L.A., we had a cell in North Hollywood that ran as much traffic in a day as all of San Diego ran in a week. But only 10% of it was revenue-generating. The rest was all fraud."