Subject: [NEXTEL-1] Still a Lot of Static in Telecom

From: Marcelrf <[email-masked]>
Date: Wed, 18 Feb 2004 16:50:49 -0500

TECH INVESTOR

Still a Lot of Static in Telecom

The Cingular-AT&T Wireless deal won't usher in a wave of wireless
mergers anytime soon.
By Paul R. La Monica, February 17, 2004

NEW YORK - While it's tempting to say that the merger of Cingular
and AT&T Wireless (AWE) is bad news for consumers, that probably
won't be the case.

And for that reason, this deal won't make the wireless sector any
more compelling for investors -- competition will likely remain fierce,
and continue to weigh on companies' financial results.

Now that consumers can switch carriers and take their numbers with
them, pricing is more important than ever.

And it may be even more important once the Cingular-AT&T
Wireless merger is completed -- the bigger and stronger
Cingular could try to win over even more customers by slashing prices.
In case there was any confusion about which carrier the new
Cingular specifically has its sights set on, AT&T Wireless CEO John
Zeglis added the following piece of trash talk during a conference call
Tuesday: "Hey Verizon, can you hear us now?"

Verizon Wireless, currently No. 1 in the business, will fall to No. 2
once the AT&T Wireless-Cingular deal closes.
Less competition? Really?

If Vodafone (VOD) won the bidding war for AT&T Wireless, the number of
major national carriers would have remained at six, giving investors
even less reason to expect pricing to become more rational.

Still, it's hard to imagine a more sane pricing environment just because
there will be only five major carriers.
"Fifteen years ago it only took three long distance providers to drive
down rates," notes Barry Randall, manager of the First American
Technology fund, referring to the emergence of Sprint and MCI to compete
with AT&T (T).

What's more, the notion that Cingular-AT&T Wireless is creating an
environment with fewer competitors is not really accurate. Albert Lin,
an analyst with American Technology Research, said that there are other
emerging threats, such as the rapidly growing Virgin Mobile, a pay as
you go wireless service (i.e. no contracts) that's being marketed to
teens.
So even more consolidation is probably needed. But can that happen?

More deals needed but not likely soon

In bidding for AT&T Wireless, Vodafone, which owns 45 percent of Verizon
Wireless, clearly showed that it was very willing to exit that joint
venture in order to gain full control of another wireless carrier. Scott
Cleland, chief executive officer of Precursor, an independent research
firm that focuses on telecom, described the Vodafone/Verizon Wireless
partnership as a "loveless marriage."

But it will be difficult for Vodafone to find another carrier that would
mesh as well as AT&T Wireless would have.
Sprint PCS (PCS), like Verizon, operates its network on the code
division multiple access (CDMA) standard. So that would not be a natural
fit for Vodafone to own since its European wireless business runs on the
global system for mobile communications (GSM) standard. Cingular and
AT&T Wireless also run on GSM networks.

Nextel (NXTL)? The company, with its walkie-talkie like phone service,
has its own standard. Plus, the stock has been on a tear as of late and
with a market value of $31.5 billion, it's hard to imagine Vodafone
being able to pay the necessary premium for it. After all, Vodafone
pulled the plug on its AT&T Wireless bid once the price tag grew north
of $40 billion.
T-Mobile? It also runs on GSM, making it a more likely target for
Vodafone. But Vodafone has had an acrimonious relationship with
T-Mobile's parent company, Germany's Deutsche Telekom.

More consolidation may eventually happen but don't expect it anytime
soon. Kevin Calabrese, an analyst with Argus Research, said that he
doesn't see another major wireless merger taking place for at least
another year. Nonetheless, shares of Sprint PCS, Nextel and Deutsche
Telekom all surged more than 5 percent Tuesday morning.

If anything, Calabrese said that it's more likely for smaller regional
carriers like Western Wireless and Dobson Communications to either get
bought or merge with each other. Curiously, these two stocks were only
up slightly Tuesday.

And Rick Black, an analyst with Blaylock & Partners, said Alltel, the
nation's seventh largest wireless carrier, could make a play for Sprint
PCS. But he doesn't see that happening for at least a year or two. And
such a deal wouldn't do much to alleviate price competition either since
it would essentially vault Alltel to major carrier status.

Lin argues that it will take two or three years for Cingular and AT&T
Wireless to fully integrate their merger, which the companies hope to
close by the fourth quarter. By that point, the landscape will already
have changed ... and competition will remain fierce.

"By the time we get to 2006 or 2007, there will be a ton of new service
providers offering wireless voice and data," said Lin. "It's too late to
think about the number of carriers shrinking. Five years from now we'll
be looking at another wave of consolidation."

It looks like the more things change in wireless, the more they stay the
same.
Analysts quoted in this piece do not own shares of the companies
mentioned. Blaylock & Partners has done investment banking for Nextel
and Verizon but none of the other firms have banking ties to companies
mentioned in this story.

http://www.business2.com/b2/web/articles/print/0,17925,591754,00.html

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