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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 As more rivals, such as Wi-Fi outfits, ISPs, and even radio broadcasters, encroach on their turf, the wireless providers may need to merge
The mass of people without Lachman's deep pockets could come to the same conclusion, too. Trying to make consumers think twice before renewing their cell-phone contracts, companies are storming the gates of the nation's wireless carriers with alternative technologies and services. TIME OF WEAKNESS. The threat comes at a time when the wireless carriers are vulnerable after years of pell-mell expansion. The Big Six -- Verizon Wireless, Cingular, AT&T Wireless, Sprint PCS, Nextel (NXTL, and T-Mobile -- have billions in debt. Their revenue growth has slowed to 20% annually from the triple-digit pace of the mid-1990s, delaying sustained profitability for some to 2004 or 2005 -- a decade or so after they started in the business. Now, the carriers find themselves under attack in every cellular market, from data transmission to voice calls. The rivals range from Wi-Fi providers and radio broadcasters to Internet service providers (ISPs). If that weren't enough, proposed legislation that would let customers keep their phone numbers no matter which carrier they move to threatens to further intensify wireless competition -- and worsen the industry's losses. This combination of factors could be the final trigger for the industry's long-awaited consolidation. Perhaps because half of the six major carriers were cash-flow-positive last quarter, "we're not seeing any indications that the industry is about to consolidate," says Luiz Carvalho, an analyst with Morgan Stanley. But the U.S. remains one of the most competitive wireless markets in the world, with eight carriers jockeying for position vs. two in many other markets. In theory at least, consolidation would cure many of the industry's ills. "[But for it to start], winners and losers have to be more clearly defined," says Tole Hart, an analyst with market consultancy Dataquest/Gartner. "Carriers have got to have more pain." SCORCHING HOT SPOTS. That hurt appears to be coming in 2003, which is starting to shape up as the year of Wi-Fi. Short for wireless fidelity, Wi-Fi is essentially a collection of thousands of access points around the country -- often called "hot spots" -- that allow anyone within a 300-foot radius and possessing a laptop with a wireless card to surf the Web at data-transfer speeds of 1 megabyte per second, vs. 56 kilobytes per second for most carriers' newly built networks. Using wireless nodes generally costs one-fifth to one-fiftieth what a data-services subscription from existing wireless carriers costs, estimates Andrei Jezierski, a partner with tech consultancy i2 Partners in New York. And these nodes should soon become omnipresent. Recently, fast-food king McDonald's (MCD ) pledged to offer an hour of free Wi-Fi access with combination meals at 300 restaurants in three U.S. cities by yearend. And on Mar. 12, Intel (INTC ) unveiled chips that enable laptops to connect to Wi-Fi. Wi-Fi is almost certain to siphon off some of the data revenue that cell-phone carriers have been banking on as they've undertaken expensive upgrades to connect advanced cell phones to the Internet. Furthermore, Wi-Fi operators could soon start eating into the carriers' voice business. In this year's second half, Avaya (AV ), No. 2 cell-phone maker Motorola (MOT ), and Proxim (PROX ) will introduce a prototype cell phone and accompanying technology that will connect to the Web via both cellular networks and Wi-Fi hot spots. RADIO CALLING. Likely the first such combination phone from a major manufacturer, the device should allow users to route their calls through the Internet and save on long-distance and international conversations. Eventually, it could also let customers bypass cellular providers on wireless calls. The only consolation for the Big Six is that such capability won't become widespread until several years from now, says Kathryn Korostoff, president of tech consultancy Sage Research in Natick, Mass. Serious competition from radio, of all things, could be much closer. Many stations are now converting from analog to digital format, mainly to improve sound quality. The first digital radio receivers, from manufacturers such as Kenwood, should go on sale in the second quarter of this year for around $100 more than radios based on older technology. They should allow listeners to see sports scores and stock quotes -- services offered by cell-phone carriers today, says Robert Struble, president, CEO, and chairman of iBiquity, which licenses the technology that makes this possible to radio makers. As early as 2004, he adds, broadcasters could even start offering advanced services, such as traffic reports on demand. The beauty of such radio-based services for broadcasters -- and the problem for wireless carriers -- is that consumers will likely enjoy them for free, says Struble. Because the technology is relatively cheap, he explains, broadcasters probably can get a return on their investment from advertising alone. Indirect as the threat sounds, it could be bigger than the mobile-phone carriers imagine: The U.S. now has 800 million radio receivers, and 70 million new units are sold every year. iBiquity figures that digital technology will make its way into most radios in a little more than a decade.
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