Subject: [NEXTEL-1] Wireless Firms Can No Longer Count On Explosive Growth in Subscriber Bases (As predicted by Jack D.)

From: Marcel <[email-masked]>
Date: Mon, 06 Jan 2003 13:50:20 -0500

Wireless Firms Can No Longer Count On Explosive Growth in Subscriber Bases (As predicted
by Jack D.)
January 6, 2003 1:17pm

Jan. 6--Right around now was supposed to be the time the US wireless industry would be
turning fat, happy, and rich.
With market penetration recently crossing the crucial 50 percent mark in Greater Boston
and nation     ally, cellphones are now in the hands of every other American. High-speed
wireless data services were launched nationally over the last year by several carriers.
Using cellphones to send instant messages and digital photo-graphs has become a reality.
But as industry executives and analysts look to the new year, they see more hard slogging
ahead, not an easy coast to big
profits.

The price wars that have delighted consumers are squeezing wireless company profits. With
per-minute calling rates dropping as rapidly as cellphone usage grows, the average monthly
US wireless bill has fallen to about $51 from $65 five years ago.
Most carriers have seen their rate of customer growth slow in the last year. And they are
having to spend steadily more, not
less, for each new customer they add. "Churn" -- subscribers jumping from carrier to
carrier -- costs them 2 or 3 percent of their customers every month.

Next November, a long-delayed federal policy allowing customers to switch carriers and
keep their existing phone numbers is set to take effect. It could touch off a huge wave of
defections among disgruntled customers, including lucrative corporate accounts, who may
have stayed with an unsatisfactory carrier only to avoid the hassle of switching phone
numbers.
Hard numbers won't be available until quarterly earnings reports are released late this
month. But it already appears that the new wireless data services are a serious
disappointment, if not an outright flop, for companies like AT&T Wireless, Sprint PCS, and
Verizon, which have poured billions of dollars into upgrading their networks to match the
Internet connection speeds of a dial-up modem.

Sprint PCS, which has been slashing prices for its "PCS Vision" data service that includes
wireless photography, recently told analysts it expected to have only 15,000 customers for
the heavily promoted service by the end of 2002. After launching one
nationwide high-speed wireless data service, AT&T late last month scaled back a planned
rollout of an even faster version from 15 cities to four.

And competition from so-called WiFi hotspots sprouting up by the thousands in coffee
shops, hotels, and airports -- soon to be
supercharged by a new 20,000-location WiFi service backed by tech titans AT&T, IBM, and
Intel -- may undercut the cellular industry's whole costly push into wireless data just as
their services hit the market.

"Clearly, in the US, it's going to be a tough time for the wireless carriers in 2003,"
said John Yunker, an analyst with Pyramid Research in Cambridge. "It's a maturing market
or even a mature market" that Pyramid predicts will gain only 13 million new subscribers
this year, down from 17 million in each of the last two years and 23 million in 2000.

Phil Marshall, a wireless analyst with the Yankee Group in Boston, said, "It would look
like a very healthy industry and one that should be very profitable, but we've got some
pretty strong price wars taking place."
Chris Foste, analyst for Technology Business Research in Hampton, N.H., said "the industry
is not adding customers very rapidly because of market saturation and lack of
differentiation and compelling features."
For nearly two decades, wireless carriers have been able to rely on explosive growth in
subscribers and phone usage. But "the next 20 percent of [market] penetration is going to
be hard," said E.Y. Snowden, chief executive of Boston Communications Group Inc., a Woburn
company that provides back-office software systems for prepaid wireless offerings from
Cingular, Verizon, the Nextel-affiliated Boost Mobile, and others.

Across the industry, mounting competition and chronic customer churn is making it steadily
more expensive for carriers to add new subscribers. At Nextel Communications, for example,
the cost per net new subscriber jumped from $440 in the second quarter last year to $460
in the third. Sprint paid $395 per net new customer in the third quarter, up sharply from
$285 in the same period a year earlier. T-Mobile's numbers jumped from $291 in the first
quarter of 2002 to $322 in the third quarter.
One statistic illustrates the bind in which wireless companies find themselves: Nextel
reported that it cost $383 million to
provide voice and data services to its 10 million subscribers in the third quarter -- but
$412 million to market and sell the service in the first place.

A new Bear Stearns-Booz Allen & Hamilton study recently predicted that wireless data
services are unlikely to exceed 10 percent of carrier revenues by 2007.
"Increased competition and reduced market power for carriers will most likely lead to
margin erosion among corporate
customers" that are most likely to buy wireless data services for employees to connect to
company networks, the report said.
For all the uncertainty the industry faces about its future profitability, the picture
isn't uniformly bleak. Nextel, which has been
on track to add more than 2 million subscribers during 2002, has seen its stock soar more
than 150 percent from lows in July as its earnings and debt loads have improved sharply.
Shares of AT&T Wireless, which Wall Street credits with a stronger balance sheet than most
of its competitors, have bounced back 25 percent since the summer.

One bright spot identified by Morgan Stanley analysts is that, with most big network
upgrades completed, capital spending as a percentage of sales should drop from 29.6
percent last year to 18.3 percent in 2004. Most carriers are expected to generate
improving cash flow and profits in the coming year, if not as abundantly as once forecast.

And from the standpoint of investors, if not consumers, one of the most promising
developments that could come in 2003 is the beginning of a wave of mergers that would
reduce the industry from six big national players to four or even three. That could help
staunch the kind of hyper-price competition that has ravaged the airline and long-distance
phone sectors and thwarted wireless carriers from turning booming phone usage into sharply
improved profits.

As of this month, the Federal Communications Commission lifted a cap on the amount of
"spectrum," or wireless channel licenses, that any carrier can own in a given market. That
policy change would remove what has been a significant obstacle to widely speculated
mergers by allowing the creation of super-sized carriers.

Because of the kinds of network operating systems they use, the most likely combinations
have been seen as some union among AT&T, Cingular, and T-Mobile, or a Sprint PCS-Verizon
marriage -- which Sprint has said it is not interested in. Nextel remains an island
technologically, using a Motorola-developed network system, but its industry-leading sales
and popularity among high-end business users could make it an attractive takeover target
nonetheless.

"Industry structure is still a problem, with too many competitors and too much pricing
competition," said Merrill Lynch analyst
Linda Mutschler.

Ron Dykes, chief financial officer of BellSouth, which owns Cingular in a 40-60
partnership with SBC, said anemic third-quarter results for Cingular "reflect the
hyper-competition in the industry. Would I like to have Cingular's performance better than
it is?

Of course, but there is a fanatical level of competition in the market."
However, Foster, the Technology Business Research analyst, said he has recently concluded
that "the mega-merger scenario will be delayed until late 2003 at the earliest."

The main factor Foster sees is that T-Mobile owner Deutsche Telekom has been backing away
from its earlier push to find a
buyer or merger partner for the Bellevue, Wash.-based carrier, which Foster said would be
the most likely "triggering event" for industry consolidation.

"I think industry executives have run through all the potential scenarios and don't see
how they can come out in a dominant position with the debt they will be forced to take on"
for an acquisition, Foster said.

Among other developments analysts and industry executives look for in the year ahead,
Sprint PCS and Verizon are working on their own versions of Nextel's popular "direct
connect" walkie-talkie feature, one of the few unique technology offerings among wireless
carriers, and may launch them later this year. Current versions, however, require up to 8
seconds to set up the two-way connection, which could limit its popularity among business
customers.

At the same time, Nextel is poised to expand its direct connect service regionally and
nationally this year, so that two subscribers in, for example, Boston and Washington,
D.C., or even Seattle could have a walkie-talkie-like conversation.
With color-screen phones now coming down in price to as little as $50 after rebates,
Sprint's Larry McDonnell said his company is eyeing new wireless Web news services that
would offer "slide shows" of multiple images illustrating story text, a first step toward
downloadable five-second video clips that could come late this year.

"You're paying a fraction of what you used to pay for a color screen, and once you get it,
you really realize what else you can do with your phone besides phone calls," McDonnell
said.

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