Cingular: Cool Phones Ring In a Merger


By Roger O. Crockett A new No. 1 cell-phone company is looming on the horizon, and it's expected to make a major splash. BusinessWeek Online has learned that Cingular Wireless -- whose $41 billion acquisition of AT&T Wireless (AWE) was approved by the Justice Dept. on Oct. 25 and the Federal Communications Commission Oct. 26 -- is preparing to debut the merged outfit this fall with some of the slickest new phones on the market. The Atlanta-based carrier has landed exclusive rights to the new Motorola Razr V3 and the Sony Ericsson se710a. Both are high-end multimedia phones expected to lure sophisticated buyers.

These are no ordinary handsets, and each has generated lots of buzz from industry insiders. The Motorola Razr is a design triumph. It's just a half-inch thick when closed. Open, it's as thin as a Q-Tip. Yet it manages to pack in a VGA camera with 4x zoom, 3D graphics capability, and 22 kilohertz polyphonic speaker technology.

SMALL DIVESTMENTS. The Sony Ericsson se710a, though much bulkier, is also a multimedia powerhouse. The phone swivels rather than flips open to reveal the keypad. When closed, it looks and behaves like a 1.3 megapixel digital camera. It's also an FM radio and MP3 player. And it has a massive color LCD screen that's an excellent gaming and messaging device.

Cingular is expected to announce the new phones in mid-November and had been waiting for the FCC to sign off on the acquisition. Federal regulators' approval required the companies to shed some assets, but this poses no impediment to the deal. Under the agreement with Justice, filed in federal court in Washington, Cingular must divest the combined company's assets in relatively small markets in 11 states -- from Kansas to Connecticut. The FCC said the companies must sell AT&T Wireless operating units and associated airwaves in 16 markets, plus airwaves in Dallas and Detroit.

"We're in great shape," says Cingular COO Ralph de la Vega. "We're supportive of the conclusions that [regulators] have reached." Notes the outfit's spokewoman, Jennifer Bowcock: "The divestitures are not a surprise."

MORE EXCLUSIVES. In the hotly contested cellular-service market, nabbing exclusive rights to such phones can lure sought-after subscribers. That's something Cingular, a joint venture between local phone giants SBC Communications (SBC) and BellSouth (BLS), desperately needs. Its merger with AT&T Wireless will give Cingular 47.6 million subscribers, catapulting it past the 41 million customers that current market leader Verizon Wireless has. But that status might not last long unless Cingular can keep subscribers from bolting to Verizon and others.

Cingular is plagued by above-average customer defections. Verizon's network quality is tops in the industry. Cingular suffers from a network that, while significantly upgraded, is still on the mend. That's one big reason its churn rate edged up from 2.7% in the second quarter to 2.8% in the third, while Verizon's is hovering around a more wholesome 1.5%.

One surefire way to keep customers is by offering them cool phones. Like most cellular providers, Cingular plans to lock in new buyers with a two-year contract. Under that plan, the Motorola will go for $499 and the Sony Ericsson for $399. BusinessWeek Online has also learned that Cingular has secured exclusives for two additional phones as well -- the Motorola V551 and the Sony Ericsson Z500 -- and is negotiating for two more, bringing the total number of exclusive handsets to six. "This is just the start," de la Vega says.

GAINING LEVERAGE. With high price points, these phones aren't for everyone, but they're hot models that discriminating consumers can't get at Verizon or any other U.S. wireless provider. And that should pay off. "People stay with a carrier because they can get great handsets," says Seamus McAteer, senior analyst for wireless researcher MMetrics. "It's important to have great new designs, particularly to hold onto the high-paying early adopters."

If Cingular can keep its exclusive arrangements for the long term, then it can build a serious lead over the competition. No doubt, rivals like T-Mobile, which uses the same network technology as Cingular, will push to get the phones. But with AT&T Wireless under its belt, the larger Cingular will gain some leverage to sway phone manufacturers its way. As McAteer says, "That could have material impact." Cingular's challenge will be to make the impact last for the long term. Crockett is deputy manager for BusinessWeek's Chicago bureau


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