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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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MARCH 18, 2003 SPECIAL REPORT: THE SQUEEZE ON WIRELESS Cellular Carriers under Siege [Page 2 of 2]
If everything falls into place, NextWave could start building parts of the multibillion-dollar network later this year in big cities such as New York. Unlike Wi-Fi hot spots, NextWave's network would offer ubiquitous mobile coverage, though at a much higher price. The primary threat to wireless carriers is that NextWave plans not to compete with them, but rather to enable wireless startups to use its network for that purpose. That could give rise to multiple new rivals. However, NextWave still faces big obstacles. Creditors could force it to sell its spectrum licenses, or it could fail to attract the investment it needs. At the same time, Internet service providers are ratcheting up the pressure on wireless carriers. Take EarthLink (ELNK ), which serves 4.8 million subscribers, most of whom buy dial-up Internet access. The ISP has offered its customers wireless access to e-mail and content since early 2001 -- and, though it doesn't break out its subscriber numbers, it says signups have exceeded expectations. TRUSTED BRANDS. Next, the business plans to use the wholesale minutes it buys on networks of carriers such as AT&T Wireless and Cingular to offer instant messaging and alerts to its wireless customers, says Brent Cobb, a vice-president at EarthLink. And on Mar. 14, the ISP entered the phone business, launching a voice-over-Internet service for its broadband users. Earthlink has found that bundling services such as broadband and wireless access can reduce churn in its customer base by 25% or more. ISPs are in a unique position to provide viable and intense competition because many of them have brands -- think Yahoo! (YHOO ) and AOL (AOL ) -- that are as strong as those of the wireless carriers. "Customers trust us," Cobb says. And portals have the advantage of a much lower user-acquisition cost. A cell-phone carrier spends $350, on average, to sign up a new wireless subscriber, while EarthLink can tap into its existing customer base for a fraction of that, says Cobb. At the same time, carriers' efforts at using joint ventures to reach specific audiences such as teens look like they could backfire. These outfits' prepaid calling plans, which don't require contracts or credit checks, are starting to attract some of the mobile-phone carriers' traditional customers -- those in their late 20s and 30s. A concern called Boost, a joint venture between Boost Mobile and Nextel, is now targeting those between 18 and 35 -- plus anyone "young at heart," says Boost Mobile CEO Peter Adderton. Many customers of Virgin Mobile, a joint venture of Sprint PCS and Britain's Virgin Group, also fall outside the teen category, analysts say. The wireless carriers are letting the cannibalization go on for now, since they argue that the majority of customers who use such services wouldn't be profitable for them. FOOTLOOSE CUSTOMERS? Finally, wireless providers could take a hit from proposed legislation in Washington, expected to be approved as early as this fall, that would let customers keep their phone numbers as they migrate from one carrier to another. Potentially, anyway, wireless insiders say this could lead to skyrocketing churn, now at 2% to 3% a month, in the industry. Price wars between existing service providers could also erupt. The legislation, supported by many consumer groups and members of Congress, would require the industry to spend more than $1 billion on new infrastructure, says Sprint PCS President Len Lauer. Combined, such pressures should send carriers scurrying to make merger deals. Perhaps Cingular, AT&T Wireless, and T-Mobile would merge, says Gartner's Hart. Nextel or Cingular could merge with the nation's largest carrier, Verizon Wireless, he adds. They face problems, however, such as huge debts. And in case of mergers, the carriers might also face massive write-offs of their networks' value, which has fallen in the past several years, says analyst Martin Dunsby with wireless consultancy InCode Telecom. Nonetheless, Hart predicts that the first deals could be announced in 12 to 18 months. And they could ripple throughout the wireless business, setting off consolidation in the wireless-equipment industry and perhaps in the handset area. Even suppliers that used to focus just on their cell-phone customers are starting to branch out -- to alternative wireless technologies. At equipment maker Nortel Networks (NT ), Wi-Fi is already one of its fastest-growing businesses. "What the individual needs is not to have to think of [what] network they're using," says Dave Murashige, a Nortel vice-president. PARTNER OR RIVAL? Carriers will likely hop on the bandwagon, too. "There's nothing that keeps carriers from adapting" Wi-Fi to their networks, says Vic Hayes, a senior scientist at chipmaker Agere Systems (AGRA ) who's often called the father of Wi-Fi. And on Mar. 10, Boingo Wireless in Santa Monica, Calif., began offering its 1,200 Wi-Fi hot spots located in 43 states to cell-phone carriers who can use the service under their own brands. Boingo considers itself a partner rather than a competitor to wireless companies, says Christian Gunning, its director of product management. So do, for now, the wireless outfits that serve the youth market and most ISPs and portals. Today, Microsoft's (MSFT ) MSN portal offers its content through agreements with Verizon Wireless and T-Mobile. "We've been very pleased with the growth of the service," says MSN's Lisa Gurry, a lead product manager. Still, enemies are storming the carriers' empires from all sides. With mobile-service providers already stretched thin, they could have a tough time answering the challenge -- until, that is, they band together in fewer and stronger companies.
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