Subject: [NEXTEL-1] Merrill Lynch sees as-expected subscriber additions at wireless providers in report 1/2/03

From: Marcel <[email-masked]>
Date: Sat, 04 Jan 2003 19:57:16 -0500

Merrill Lynch sees as-expected subscriber additions at wireless providers in report 1/2/03

01/02/03 08:51 AM
Source: Merrill Lynch

After surveying about 60 wireless stores in late December, analyst
Linda Mutschler says store sales seemed to improve either after
Thanksgiving or just before Christmas. She expects fourth-quarter
subscriber results in-line with expectations, despite a dip in gross
additions from last year. Wireless service providers offered heavier
discounts and relaxed credit policies to sustain subscriber growth,
Mutschler finds. She maintains a "neutral" outlook on the sector,
with "neutral" ratings on AT&T Wireless and Sprint PCS, and a "sell"
rating on Nextel Communications.

Wireless Store Visits

Less Seasonality—But In Line Overall

Reason for Report: Industry overview

Linda J. Mutschler, Wendy M. Liu and David Janazzo

Highlights:

* Following our store visits during early December, we visited and
surveyed about 60 stores during late December. It seems that while
November was weak and early December was slow at many stores, sales
started to trend up, depending on the store, either after
Thanksgiving or shortly before Christmas. What did we find?

* First, based on our checks, we estimate that gross additions for
the six national operators fell by about 6% year-over-year in 4Q 02,
for 12 million gross additions and 3.1 million net additions—in line
with our estimates.

* Second, we think 4Q 02 marked the second holiday season in a row
where seasonality was less of a factor for wireless sales. However,
unlike 4Q 01, we think that investor expectations for 4Q 02
subscriber growth are fairly low, such that actual results at most
national operators are likely to be in line with, and perhaps in
some cases better than, investor expectations.

* Third, we think that operators did have to do more during 4Q 02 to
sustain subscriber growth. This included heavier discounts on high-
end handsets and better handset upgrade terms for existing
subscribers. In addition, according to our store visits, some
operators also relaxed credit polices during 2002.

* Considering all of this and the fact that longer term industry
issues (including industry structure, potential risks regarding
pricing and ARPU) still remain, we are maintaining our Neutral
industry outlook. What about the numbers?

* For the US wireless industry, we are maintaining our estimates for
12.5 million net adds for 2002 (+10% y-o-y) and 11 million net adds
for 2003 (+8% y-o-y).

* For AT&T Wireless (AWE, C-2-9, $5.65), we are raising our 4Q 02
net subscriber addition estimate from 550,000 to 625,000. We are
maintaining our EBITDA estimate of $893 million. That said, we think
that the company has yet to meaningfully tackle its customer
migration to GSM.

* For Nextel (NXTL, C-3-9, $11.55), we are maintaining our 4Q 02
estimates of 447,000 net additions, 2.1% churn and $900 million in
EBITDA. We think that it is possible that Nextel could meet our net
addition estimate with lower than estimated gross additions and
lower than estimated churn given its focus on subscriber quality and
EBITDA.

* For Sprint PCS (PCS, C-2-9, $4.38), we are maintaining our
estimates of 250,00 net additions, 3.5% churn and $669 million in
EBITDA. It appears that PCS's gross additions continue to be
impacted by negative customer perception regarding its network
quality and customer care. Depending on how quickly PCS fixes these
issues and improves the quality of its subscriber base, this could
impact what PCS can realistically achieve during 2003, in our view.

* We are maintaining our Neutral ratings on AWE and PCS and our Sell
rating on Nextel.

Merrill Lynch Global Securities Research & Economics Group

Global Fundamental Equity Research Department

Investors should assume that Merrill Lynch is seeking or will seek
investment banking or other business relationships with the
companies in this report.

Refer to important disclosures at the end of this report.

Less Seasonal, But In Line Overall

(For additional details on our earlier store visits, please refer to
our December 13 th report titled "Wireless Store Visits—Okay So Far,
Waiting on December").

Based on our checks during early and late December, we think that
wireless sales picked up either after Thanksgiving or the week
before Christmas at a majority of the stores we visited or surveyed.
It appears that many shoppers waited until the last minute to make
purchases.

Based on our revised estimates, we think overall gross additions at
the six national operators increased by approximately 6%
sequentially during 4Q 02 over 3Q 02. Note that 4Q 01 gross
additions for the six national operators as a whole increased by 12%
sequentially over 3Q 01. On a year-over-year basis, we estimate that
gross additions were down about 6% for the six national operators
during 4Q 02.

We think that investor expectations are low

Regarding what could happen to wireless stocks in the near term, we
think that one important issue is that investor expectations for 4Q
02 are fairly low. As a result, we think that actual subscriber
addition results at most national operators are likely to be in line
with, and perhaps in some cases better than, investor expectations.

In Table 1, we show our net addition and EBITDA estimates for AT&T
Wireless, Nextel and Sprint PCS, as well as sell-side consensus
estimates and the most recent company outlooks.

Table 1: ML Estimates and Consensus Estimates

Net Adds 4Q 02E/ 2002E/ 2003E/ EBITDA ($M) 4Q 02E/ 2002E/ 2003E

AWE

ML Current 625K 1,893K 1,450K 893 3,813 4,208

ML Previous 550K 1,818K 1,450K 893 3,813 4,196

Consensus 600K 1,868K 1,600K 900 3,820 4,300

AWE Outlook 732K+ 2.0-2.2M NA NA $3.7-3.9B NA

Nextel

ML Current 447K 1,900K 1,750K 900 3,180 3,824

Consensus 450K 1,903K 1,620K 875 3,155 3,800

NXTL Outlook NA Approx. 1.9M NA Flat w 3Q 02 ($878M) At least $3.1B
NA

Sprint PCS

ML Current 250K 1,205K 900K 669 2,801 3,404

PCS Outlook Net Gain NA NA NA $2.8B $3.3-3.4B

Source: Merrill Lynch research estimates and company data.

Industry structural issues

Looking ahead, we think that the structural issues we have
highlighted with regard to the US wireless industry still remain.

First, we continue to think that average revenue per unit (ARPU)
could be at risk as we move into 2003, but the exact timing is
difficult to call.

Second, we think that industry revenue growth is slowing. Unlike
Europe, where subscriber growth has slowed, but ARPU has started to
trend up, the US, given its pricing structure, doesn't have (in our
view) the same potential for ARPU growth.

That said, it is a good sign that companies are driving to FCF, and
we could become more positive if we felt that the pricing
environment could stabilize – possibly due in part to stronger than
expected subscriber growth, stronger than expected minutes of use
growth, and/or a change in the competitive structure due to
consolidation.

What about consolidation?

We think that there are a number of reasons why a deal has not yet
been struck – including valuation, control, regulatory risk, and
even game theory. We still tend to think that deals will generally
fall along technology lines with two out of the three GSM carriers
(Cingular, AT&T Wireless and T-Mobile) being the most likely to
consolidate first. Given some of the results over the past few
quarters, especially at Cingular, for example, perhaps the pressure
to consolidate is building.

2002 and 2003 estimates

Based on our revised 4Q 02 gross and net addition estimates, our
full year 2002 net addition estimate for the US wireless industry
remains approximately 12.5 million, for 10% year-over-year growth.

For 2003, we continue to estimate net additions of 11 million for
the US wireless industry, for 8% year-over-year growth.

* Why less seasonality over the past two years?

According to the stores we spoke with, 4Q 02 was the second holiday
season in a row where wireless sales were not as seasonal as they
have been in the past.

We think that several factors might have contributed to weaker
seasonal trends in the past two years:

1) Wireless penetration reached an estimated 48% at the end of 3Q
02. We think that penetration among the 18-65 age group is probably
substantially higher, perhaps on the order of 60-75% in large urban
markets. At this point, there are few first time wireless users
signing up, with most stores we spoke with (in large urban and
suburban markets) putting first time wireless users at less than 5%
of their sales.

Interestingly, based on our global matrix data, a number of European
countries experienced less seasonality in wireless subscriber
additions after reaching penetration levels ranging from 48% to 55%.

2) In part due to this level of penetration, the postpaid wireless
phone is now less of a gift item than before. Buying a postpaid
phone as a gift is also a bit of a hassle, because in order to
receive handset rebates, service activation is often required at the
point of sale. That said, some stores told us that Virgin Mobile's
prepaid phone was a popular gift item during 4Q 02, in part due to
its lower rates per minute and longer expiration dates relative to
its competition.

3) 2002 has been a very promotional year in terms of wireless sales.
As promotions were offered throughout the year, rate plans have
gotten cheaper, and handset rebates were offered regularly.

4) Clearly, the weak economy and weak consumer confidence continue
to be factors, impacting overall consumer spending, including
spending on wireless phones.

* Subscriber growth has been harder to achieve

We think that headline subscriber growth numbers may look okay
during 4Q 02. Furthermore, near term EBITDA and FCF results could
benefit from reductions in various operating cost and capital
expenditure items. However, operators did have to do more to drive
subscriber growth during 4Q 02.

First, this holiday season has been more promotional than 4Q 01 in
the sense that more high-end handsets were offered with heavy
discounts versus 4Q 01. We think that this could have implications
on handset subsidies and CPGA (cost per gross addition).

Second, selected operators have shortened the periods after which
existing subscribers can upgrade their handsets at new activation
handset prices. For example, Verizon Wireless has shortened this
period from eleven months to ten months for one-year contract
subscribers. Sprint PCS recently allowed existing subscribers to
purchase phones at new activation prices every eight months.
Previously, this option was not available. AT&T Wireless allows
upgrade at new activation prices every six months and so does T-
Mobile.

Third, we think that some national operators made their credit
checks easier during late 2001 and 2002. Stores told us that these
operators include AT&T Wireless, Cingular, Verizon Wireless and T-
Mobile. However, it is difficult to measure the degree of changes on
an individual basis and how these changes have impacted subscriber
additions. According to the stores we visited, Nextel is the only
national operator that has not changed its credit requirements.

So, people are still buying phones, but are they going to pay for
the bills? It will be interesting to see if such credit policy
changes will show up in churn and bad debt expenses during 2003.

* Signs of cost cutting: no more Christmas parties

During our store visits, we saw many signs that operators are
focused on cutting costs. However, these signs are more prevalent at
some operators than others.

More than one sales representative told us that there were no fancy
Christmas parties (and, in some cases, no parties at all) this year,
and that companies have long stopped offering perks to star sales
representatives.

At some stores we visited, sales and customer care functions are now
combined, and a smaller number of employees are required to handle
both functions. At certain operators, monthly sales quotas are
sometimes modified so that sales representatives can seldom exceed
the quotas by a wide margin, thus resulting in lower commissions.

Cost controls and the slower business environment seem to have led
to lower morale among sales representatives. We sense that some
operators could make new cuts or additional cuts with regard to
their sales and marketing infrastructure.

* What about the individual operators?

Consistent with trends we detailed in our December 13 th report, we
think that T-Mobile continues to maintain a strong momentum in
gaining gross addition market share. If we were to rank operators in
term of year-over-year gross addition growth rates during 4Q 02, we
think that the order is likely to be T-Mobile, Nextel, AT&T
Wireless, with Sprint PCS and Cingular ranking toward the low end.

T-Mobile

T-Mobile's momentum has been particularly evident in the large
metropolitan markets where T-Mobile has improved network coverage
during 2002. This trend is less evident in markets where T-Mobile's
coverage is a bit lacking.

We think that T-Mobile's strength reflects what many consumers are
looking for in a wireless service provider at this point:
inexpensive rate plans, a lot of minutes, mid-tier yet inexpensive
handsets, reasonable coverage and satisfactory customer care.

Based on our checks, we think that T-Mobile could achieve net
additions on the order of 875,000 to 900,000 during 4Q 02, depending
on where the churn comes out. This compares to net additions of
869,000 during 3Q 02 and net additions of 667,400 during 4Q 01.

However, as T-Mobile adds more subscribers to its network, it will
need to expand capacity to accommodate heavier usage, and we have
started to hear tidbits regarding deteriorating coverage in some
markets after substantial improvement earlier in 2002. We think that
a common issue that operators need to manage well is keeping network
capacity needs and customer care capacity needs in sync with
subscriber additions so that both new and existing subscribers stay
satisfied with overall service quality.

Another issue that many investors have focused on is the credit
quality of T-Mobile's new postpaid subscribers. While we do get the
impression that T-Mobile's credit requirements are not difficult, we
don't necessarily think that they are lenient to the point that T-
Mobile is taking all of Sprint PCS's sub-prime subscribers. In fact,
some stores tell us T-Mobile's credit checks remain more difficult
than Sprint PCS's credit checks and that on a case by case basis,
occasionally, the T-Mobile credit checks are more stringent than
AT&T Wireless's credit checks.

AT&T Wireless

We are raising our estimate for AT&T Wireless's gross additions
during 4Q 02E from 2.13 million to 2.21 million, for a decline of
13.8% year-over-year (pro forma TeleCorp's adjusted gross additions
during 4Q 01) and for sequential growth of 13.4%. Excluding
TeleCorp's gross additions during 4Q 02, this represents a 6% year-
over-year decline in gross additions.

We are keeping our churn estimate at 2.6%, compared to 2.9% during
3Q 02 and 2.7% during 4Q 01. Thus, we arrive at our new net addition
estimate for 4Q 02E of 625,000 (net of an estimated 75,000 in
WorldCom related reseller disconnects) versus our previous estimate
of 550,000. This compares to net additions of 201,000 during 3Q 02
(or approximately 501,000 excluding the impact from WorldCom related
reseller subscribers) and 927,000 during 4Q 01.

For 4Q 02E, we estimate that service revenues will total
approximately $3.66 billion, for an increase of 12.8% year-over-
year. For 4Q 02E, we estimate that AWE's EBITDA will be
approximately $893 million.

GSM migration: We think AT&T Wireless's gross addition trends were
more solid than some of its competitors during 4Q 02. We think that
its TDMA plans and the $99.99 unlimited GSM plans have continued to
attract purchases.

However, it is worth pointing out that it appears that the majority
of AT&T Wireless's new activations have been TDMA. Furthermore,
based on our checks, the GAIT phones, although expected to operate
on both the GSM and TDMA networks, have not quite delivered to date.

Therefore, while the physical GSM network has been built, and some
subscribers are taking up the GSM plans, the migration to GSM has
just begun, in our view. We think that there are several relevant
issues with regard to the GSM migration. First is capital
expenditures. Second is competitive advantage. Third is the cost of
running two networks. If AT&T Wireless does not migrate its
subscribers to GSM quickly, it could delay capital expenditures in
the near term. To the extent that data does not take off quickly,
delaying the migration to GSM probably will not impact AT&T
Wireless's overall competitiveness with regard to the majority of
its subscribers. But, it could be an issue with some subscribers
(including some corporate accounts) that would like to have data
features and ubiquitous coverage. Lastly, the longer AT&T Wireless
delays in migrating customers to GSM, the longer it will have to
maintain the costs associated with the dual network structure.

According to our checks, during 2003, AT&T Wireless is likely to
reduce its commission payout on TDMA plans and to keep its current
payout on GSM plans as an incentive for its own store
representatives to sell more GSM plans.

It will be worthwhile to see whether this change in incentives
impacts sales representatives' behavior. In general, sales
representatives are motivated to sell plans that will stick (due to
the three-month charge back period). However, if they are encouraged
to sell GSM, and if the GSM coverage falls short of subscriber
expectations, this could create frustration for subscribers (lack of
coverage), and for AT&T Wireless (voluntary churn due to network
coverage issues).

Beyond the GSM migration issue, we think that AT&T Wireless has been
especially focused on retaining existing subscribers, perhaps more
so than some of its competitors. Moreover, AT&T Wireless remains one
of the few companies that has not yet announced significant cutbacks
in capital expenditures and/or staffing levels. We wonder if the
company will do so at its January analyst meeting.

Nextel

We are maintaining our 4Q 02E estimates for Nextel. Our estimates
are for gross additions of 1.1 million, net additions of 447,000,
and churn of 2.1% during 4Q 02E. Our gross addition estimate implies
a year-over-year growth of 3.6%.

We continue to estimate that during 4Q 02E, Nextel will generate
EBITDA of approximately $900 million, for a 41.3% service margin.

We think that it is possible that Nextel may achieve net additions
that are roughly in line with our estimate, but with lower than
expected gross additions and lower than expected churn. But we think
that such a result should still be considered solid because Nextel
is the only national operator that has not modified its credit
requirements over the past year.

We think that it is worth pointing out that based on feedback from
some stores, it appears that at this point, Nextel is doing more
sales to business, enterprise and government subscribers rather than
to consumer subscribers. According to some stores, the mobile-to-
mobile feature offered by some of Nextel's competitors has had some
impact as a counteroffer to Nextel's Direct Connect feature among
some consumer subscribers.

Sprint PCS

We are maintaining our estimate for Sprint PCS's gross additions
during 4Q 02E at 1.8 million, for a decline of 21.5% year-over-year
and for a sequential growth of 13.6%. We are keeping our churn at
3.5%, for net additions in 4Q 02E of approximately 250,000.

However, based on our checks, we think that there could be some
upside to our current subscriber addition estimates, due to
potential upside to our gross addition estimates.

We estimate that Sprint PCS will generate EBITDA of approximately
$669 million during 4Q 02E and $2.8 billion for 2002E. This compares
to EBITDA of $367 million during 4Q 01 and $1.5 billion for 2001.

Based on feedback from stores, it appears that Sprint PCS has
continued to suffer from subscriber complaints with regard to its
network quality and customer care. In fact, some competitors cited
Sprint PCS as one of the top sources for switchers. Thus, we think
that over the coming months, Sprint PCS needs to win back
subscribers that have been frustrated with customer care and with
dropped/blocked calls.

Granted, Sprint PCS has already started to improve its customer care
functions and dropped several charges it used to apply to its sub-
prime subscribers. However, we think that it will be interesting to
see when Sprint PCS's recent focus on some of these issues starts to
get reflected in improved consumer perception. And, more
importantly, we would like to see if Sprint PCS can effectively
address these issues on an ongoing basis in the context of keeping
operating costs low and capital expenditures low.

Beyond that, we think that there are two important issues with
regard to Sprint PCS over the coming quarters: the take rate of
Vision and subscriber credit quality.

Based on our channel checks, at least in some markets, the take rate
of Vision seems to have lagged year-end 2002 targets. We think that
it will be interesting to see whether subscribers will quickly catch
up on some of the new Vision games and applications during 2003.

With regard to credit quality, our sense from our store visits is
that PCS still has the most lenient credit requirement among the six
national operators at this point. We remain concerned about what
this could potentially mean for churn and profitability several
quarters down the road.

Cingular

It appears to us that Cingular has really been trying to retain its
base rather than take share from its competition. While the rollover
feature is popular and the $39.99 for 1,000 local anytime minute
plan has helped to drive business since its introduction in late
November, we think that in general, Cingular was in a defensive
rather than an offensive position during 4Q 02. We think that this
is in part due to Cingular's lack of a truly competitive national
rate plan with adequate coverage.

Therefore, we think that we could see only modest net additions from
Cingular during 4Q 02. We are currently estimating that Cingular
will add 100,000 net additions during 4Q 02, but there could be
downside to this estimate.

Verizon Wireless

On December 10 th , Verizon Wireless's CEO Denny Strigl commented at
a competitor's conference that net additions during 4Q 02 would be
similar to levels during 3Q 02. Recall that Verizon Wireless added
803,000 net new subscribers during 3Q 02. Note that excluding the
WorldCom related impact, Verizon Wireless added 1.1 million retail
subscribers during 3Q 02.

* What about ARPU?

According to a number of operators/stores we spoke to, many
subscribers re-rate their plans within a year following contract
expiration. While it may take some subscribers several years to re-
rate, a meaningful percentage (approximately 45-60%) are likely to
re-rate within eighteen months.

Because a slew of aggressive rate plans was introduced during July
2002, we think that it could take until mid-2003 for a substantial
portion of subscribers to re-rate. As subscribers continue to re-
rate, what could happen to support ARPU?

First, during 2002, some operators increased rates for ancillary
services (roaming rates, overage, directory assistance, late fees,
and etc.).

Second, some of the popular features and plans have higher monthly
access charges—for example, AT&T Wireless's unlimited GSM plan at
$99.99 and Cingular's rollover feature on plans at $39.99 and above.

Third, we think that operators have been hoping for incremental
revenues from wireless data. Based on our recent visits, we think
that data's take rates in general have been slower than expected.
Several stores told us that they had wireless data quotas earlier in
2002 but had to scale back or do away with them because after the
initial wave of subscribers, wireless data take rates have slowed.

However, SMS appears to have held onto its popularity, particularly
among younger subscribers and former pager users. Some stores tell
us that they have been encouraging SMS usage (when available) among
prepaid subscribers so that subscribers can benefit from the cheaper
SMS rate versus the more expensive voice minute rate.

Interestingly, this is a trend that we did see in Europe as well,
where SMS usage has become an important component of ARPU (on the
order of 10-15%) and EBITDA.

* What about MOUs?

According to the stores we spoke to, our sense is that MOUs are
still growing year-over-year, but perhaps at a slower pace than in
the past.

What about wireline substitution?

One of the opportunities regarding wireless usage growth has been
wireline substitution both in terms of the migration of long
distance minutes from wireline to wireless and the use of a wireless
phone as a second line or as a person's only phone.

Based on our recent store visits, we think that consumers continue
to migrate their long distance minutes from wireline to wireless.
However, according to the stores, the average consumer still likes
the idea of having a home phone, even if only with basic features.

Interestingly, we have found a high percentage of wireless sales
representatives that use a wireless phone as the only phone or as
the second line. This is probably due to several factors: 1) they
get very inexpensive rate plans, 2) they are more familiar and
comfortable with wireless service, and 3) many of them are young,
single, and do not own homes.

Wireline vs. wireless MOUs

We wanted to compare how many minutes the average US household
spends using wireline each month, and how this compares to some of
the MOU figures reported by the six national operators.

According to the FCC data during 2000, the average US household
spent up to 1,500 minutes on its wireline phone per month. Assuming
that the average household has approximately 2.7 persons, we arrive
at a usage level of 551 minutes per person per month.

Note that both local and long distance usage patterns have changed
since 2000. However, we apply the usage data during 2000 as a frame
of reference because wireline usage back then was probably less
impacted by wireless substitution than it is now. Note however,
Internet usage is also included in the wireline usage, and grew at a
meaningful rate during the late 90s.

At the end of 3Q 02, the weighted average MOUs were 483 minutes for
the six national operators in the US. Specifically, MOUs were 484
minutes at AT&T Wireless, 650 minutes at Nextel, 399 minutes at
Cingular, 660 minutes at Sprint PCS, 625 minutes at T-Mobile, and
367 minutes at Verizon Wireless.

Due to the mobility of wireless, we think that average wireless MOUs
could ultimately be higher than the average wireline MOUs.

If we assume that wireless MOUs will be 35% higher than wireline
MOUs, or approximately 750 minutes per month, then we are about two
thirds (483/750=64%) of the way there.

If we assume that wireless MOUs will only be 20% higher than
wireline MOUs, for approximately 667 minutes per person per month,
then we are about 72% of the way there (483/667=72%).

Clearly, the growth (or lack of growth) in wireless MOUs going
forward could have a meaningful impact not only on the stabilization
of ARPU levels but also on capital expenditures going forward. We
think that it will be very interesting to see what MOU trends emerge
from both 4Q 02 and 1Q 03 results.

* What about handsets?

Similar to what we saw during our early December visits, the best
selling models have continued to be 1) mid-tier and occasionally low-
end phones offered for free (after rebates), and 2) high-end phones
selling at heavier than usual discounts.

This is different from past years when primarily low-end and mid-
tier phones were offered for free or offered with significant
discounts. High-end phones were offered with heavy discounts in past
holiday seasons but typically with shorter promotional periods.

AT&T Wireless & Cingular Wireless:

According to our store visits, at both AT&T Wireless and Cingular,
the best selling handset at the high end has been the Motorola V60.
More recently, the Nokia 6360/6340, the Sony Ericsson T68i, and the
Nokia 8260/8265 have also gained in popularity. The Nokia 3360, an
older model with a fairly low price point, continues to sell well.

A highly anticipated Nokia color handset (the Nokia 7210) did not
hit the shelves during Christmas, against the wishes of some AT&T
Wireless stores. According to some stores, this model is likely to
hit the stores in late January or February.

Nextel

According to the stores we spoke to, the best selling phone at
Nextel's retail stores is the Motorola i90c. In addition, both the
color screen Motorola i95c and the i60 continue to do well. The i55
and the i35 are sturdy phones and are popular among construction
workers. According to the stores, the i55 now meets military
specifications and is sold at an attractive discount to government
employees.

Sprint PCS

One of the best selling handsets appears to be the Samsung A460, a
non-Vision phone, but otherwise complete with form factors sought
after by the average consumer, that is being retailed at cut rate
prices at most channels.

Among the Vision phones, the best selling models are the Sanyo 4900,
the Samsung N400 and the LG 5350. While people seem to like the
Samsung A500 and the new Sanyo 5300 (with built-in camera), most
subscribers purchase the three mid-tier Vision phones we listed
above because they are more affordable.

According to the stores, there are now fewer takers on the low-end
non-Vision phones because of the potential for another upgrade
occurring soon.

T-Mobile

According to the stores, several phones have been selling well. At
the high end there are the Motorola V60, and more recently the
Samsung S105, and the Motorola T720. Among the free phones, the
Samsung R225M has sold well. At the mid-range, the models that are
selling well include the Motorola V66 and the Sony Ericsson T300.

According to the stores, among the six national operators, T-Mobile
has improved its line-up of handset most significantly over the past
year. And the levels of discounts on some of its models are
substantial compared to its competition.

Verizon Wireless

Stores tell us that the best selling models are the Motorola T720
and prior to that, the Motorola V60. The T720 is perhaps the first
high-end phone for which Verizon Wireless has put on a highly
attractive promotion for a long time.

For new activations or eligible upgrades, the T720 was available for
$49.99 after a $100 mail in rebate. At some company stores, the
T720's price went back to $79.99 after a $100 mail-in rebate after
Christmas (for new activations only or eligible upgrades).

We think that the promotion of the T720 has clearly attracted more
purchases and closed a potential gap between Verizon Wireless's
handset line-up and the line-up at its competitors, including Sprint
PCS at the RadioShack channel.

* What about Valuation?

Our current valuation estimates are summarized in the table below
(not shown). Looking into 2003E, based on the fact that the US
wireless stocks have traded lower during the past few weeks, our
estimates for 2003E EV/EBITDA multiples have declined over that
period as well.

Interestingly, the 2003E EV/EBITDA average is now just slightly
greater than our estimates for the RBOCs (i.e., BellSouth, SBC and
Verizon) in the range of approximately 5.0x to 5.5x.

Investment Rating Distribution: Telecommunications Group (as of 31
December 2002)

Coverage Universe/ Count/ Percent/ Inv. Banking Relationships*/
Count/ Percent

Buy 51 34.46% Buy 18 35.29%

Neutral 74 50.00% Neutral 28 37.84%

Sell 23 15.54% Sell 9 39.13%

Investment Rating Distribution: Global Group (as of 31 December
2002)

Coverage Universe/ Count/ Percent/ Inv. Banking Relationships*/
Count/ Percent

Buy 1110 43.46% Buy 391 35.23%

Neutral 1236 48.39% Neutral 319 25.81%

Sell 208 8.14% Sell 43 20.67%

* Companies in respect of which MLPF&S or an affiliate has received
compensation for investment banking services within the past 12
months.

[AWE] One or more analysts responsible for covering the securities
in this report owns such securities.

[AWE, PCS] MLPF&S or an affiliate was a manager of a public offering
of securities of this company within the last 12 months.

[AWE] MLPF&S was a manager of the most recent public offering of
securities of this company within the last three years.

[NXTL] The securities of the company are not listed but trade over-
the-counter in the United States. In the US, retail sales and/or
distribution of this report may be made only in states where these
securities are exempt from registration or have been qualified for
sale. MLPF&S or its affiliates usually make a market in the
securities of this company.

[AWE] MLPF&S or an affiliate has received compensation for
investment banking services from this company within the past 12
months.

[AWE, PCS, NXTL] MLPF&S or an affiliate expects to receive or
intends to seek compensation for investment banking services from
this company within the next three months.

In Germany, this report should be read as though Merrill Lynch has
acted as a member of a consortium which has underwritten the most
recent offering of securities during the last five years for
companies covered in this report and holds 1% or more of the share
capital of such companies.

The analyst(s) responsible for covering the securities in this
report receive compensation based upon, among other factors, the
overall profitability of Merrill Lynch, including profits derived
from investment banking revenues.

OPINION KEY: Opinions include a Volatility Risk Rating, an
Investment Rating and an Income Rating. VOLATILITY RISK RATINGS,
indicators of potential price fluctuation, are: A - Low, B - Medium,
and C - High. INVESTMENT RATINGS, indicators of expected total
return (price appreciation plus yield) within the 12-month period
from the date of the initial rating, are: 1 - Buy (10% or more for
Low and Medium Volatility Risk Securities - 20% or more for High
Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium
Volatility Risk securities - 0-20% for High Volatility Risk
securities); 3 - Sell (negative return); and 6 - No Rating. INCOME
RATINGS, indicators of potential cash dividends, are: 7 -
same/higher (dividend considered to be secure); 8 - same/lower
(dividend not considered to be secure); and 9 - pays no cash
dividend.

Copyright 2003 Merrill Lynch, Pierce, Fenner & Smith Incorporated
(MLPF&S). All rights reserved. Any unauthorized use or disclosure is
prohibited. This report has been prepared and issued by MLPF&S
and/or one of its affiliates and has been approved for publication
in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith
Limited, which is regulated by the FSA; has been considered and
distributed in Australia by Merrill Lynch Equities (Australia)
Limited (ACN 006 276 795), a licensed securities dealer under the
Australian Corporations Law; is distributed in Hong Kong by Merrill
Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC;
and is distributed in Singapore by Merrill Lynch International Bank
Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are
regulated by the Monetary Authority of Singapore. The information
herein was obtained from various sources; we do not guarantee its
accuracy or completeness. Additional information available.

Neither the information nor any opinion expressed constitutes an
offer, or an invitation to make an offer, to buy or sell any
securities or any options, futures or other derivatives related to
such securities ("related investments"). MLPF&S and its affiliates
may trade for their own accounts as odd-lot dealer, market maker,
block positioner, specialist and/or arbitrageur in any securities of
this issuer(s) or in related investments, and may be on the opposite
side of public orders. MLPF&S, its affiliates, directors, officers,
employees and employee benefit programs may have a long or short
position in any securities of this issuer(s) or in related
investments. MLPF&S or its affiliates may from time to time perform
investment banking or other services for, or solicit investment
banking or other business from, any entity mentioned in this report.

This research report is prepared for general circulation and is
circulated for general information only. It does not have regard to
the specific investment objectives, financial situation and the
particular needs of any specific person who may receive this report.
Investors should seek financial advice regarding the appropriateness
of investing in any securities or investment strategies discussed or
recommended in this report and should understand that statements
regarding future prospects may not be realized. Investors should
note that income from such securities, if any, may fluctuate and
that each security's price or value may rise or fall. Accordingly,
investors may receive back less than originally invested. Past
performance is not necessarily a guide to future performance.

Foreign currency rates of exchange may adversely affect the value,
price or income of any security or related investment mentioned in
this report. In addition, investors in securities such as ADRs,
whose values are influenced by the currency of the underlying
security, effectively assume currency risk.

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