Just a few years ago, Cingular Wireless was the lumbering giant of the U.S. wireless business. It just couldn't seem to keep up with rival Verizon Wireless (VZ).
My, how things have changed. On Apr. 26, Cingular announced that revenues for the first quarter were up a solid 7%, to $8 billion. More surprising, Cingular said that its customer defection rate was 1.7%, or about half of what it was in the past. "Cingular is on a roll," says wireless analyst John M. Celentano of researcher Capex Alert.
Cingular's newfound success reflects the evolution of the wireless industry. Scale and scope are becoming increasingly important. While in the past scrappy smaller players could build their own solid businesses, now bulked-up companies like Cingular are reaping outsize benefits and leaving little room for niche outfits.
Two years ago, Cingular acquired AT&T Wireless in a $41 billion deal, to become the largest wireless service provider in the country (see BW Online, 11/15/04, "Cingular: It's Tough at the Top").
THRIVING, NOT SURVIVING. And Cingular's original parents, SBC and BellSouth, have combined to create a new company known as AT&T (T). By spreading its fixed costs over a larger revenue base, the company has enhanced its ability to thrive in a competitive market (see BW Online, 03/09/06, "AT&T CEO Ed Whitacre: Lord of the Rings").
Cingular is a bellwether for the rest of the wireless industry, pointing the way towards further consolidation into ever-larger companies. Sprint (S) has merged with Nextel (see BW, 12/27/04, "Why Sprint and Nextel Got Hitched "). That leaves five national wireless players: giants Cingular, Sprint, and Verizon Wireless, and smaller rivals T-Mobile and Alltel (AT).
While the number is down from seven just two years ago, there's more work to be done. Five is still higher than the number of major players in the national markets of Europe, where the norm is two or three. And it's more than twice the number of major players in the U.S. wireline phone market. "I don't know that there's room for this many wireless players," says telecom banker Jeffrey Williams, a Morgan Stanley (MS) veteran who started his own firm, Jeffrey Williams & Co.
PEAK PENETRATION. Wireless players will face more pressure over the next few years. Subscriber growth rates will slow, which means players will have to work harder to boost revenue. Market penetration is about 70%, and it's likely to top out over the next two years.
"I think we're approaching a peak in market penetration now," Celentano says. While penetration rates are in the 90s or even higher in some markets in Europe or Asia, Celentano thinks the peak in the U.S. is likely to be somewhere in the mid-70s. That's because the U.S. has a broader wireline infrastructure, and because Americans aren't as wild about gadgets as their European and Asian counterparts.
That doesn't mean that the wireless market will melt down. It will still be possible to increase revenue by adding new services and features. They include everything from music and video and satellite-based location-tracking services and social networking (see BW, 05/16/05, "Multimedia Phones"). But those services will be under price pressure in a competitive market, too.
SIZE MATTERS. The first signs of a slowing market have appeared. Average revenue per user declined more than 3% during the first quarter of 2006, even as carriers continued to roll out new products such as high-quality music and video over faster networks. Subscriber growth rose in the mid-single digits last year, percentage-wise, but it could well shrink this year.
Larger carriers already benefit from their heft. The big national carriers had margins of 36.6% during the fourth quarter of last year, up from 36.3% during the last quarter of 2004. Over the same period, margins for smaller regional carriers declined to 30.6% from 30.9%.
Over the next year or two, the smaller national carriers will be most in need of a partner. Williams says he believes Alltel management would like to find a buyer, and that Verizon Wireless and Sprint each would make good fit. All three companies use the same wireless technology, and the geographic fit would be good in either scenario.
STICKY ISSUES. A deal isn't likely until next year, though. That's because Alltel is spinning off its local phone business. Once that is accomplished, most likely late this year, it will have to wait at least six months to do another deal. Otherwise, it would compromise the tax-free status of the local spin-off.
Sprint can't make a move right now for similar reasons. It's spinning off its local business, too. And it won't be free to do another deal until next year.
Verizon has issues of its own. Verizon Wireless would need permission from its partner, Vodafone (VOD), which owns 45% of the joint venture. Vodafone is under increasing pressure from investors, who want it to leave the U.S. market, scale back its global ambitions, and focus on Europe and Asia. But it could be months or longer before Vodafone leaves the U.S.
LIMITED BUNDLING. The outlook for T-Mobile is murkier. Parent Deutsche Telekom (DT) also faces pressure from some investors who want it to leave the U.S. market. But management doesn't appear inclined to sell.
With a much smaller subscriber base than Sprint, Verizon, or Cingular, T-Mobile might seem to be at a disadvantage. But since it's part of a larger Deutsche Telekom business that operates across Europe, it can reap some of the benefits of scale when it comes to purchasing equipment.
It doesn't have the same economies when it comes to advertising in the U.S., though. It lacks the land-line networks that AT&T and Verizon have, limiting its ability to create bundles of services that can attract and hold onto many kinds of customers.
CONSOLIDATION AHEAD. A land-line offering might not be vital for every player, as evidenced by Sprint's decision to get rid of its local-line networks. But Sprint is larger and more technologically advanced than T-Mobile, making it a stronger pure wireless play. That means T-Mobile, which has focused on discount service, might need a buyer. The most likely fit would be Cingular, which uses similar technology.
One or two more giant wireless deals are possible, too. Williams thinks an alliance between Verizon and Sprint would make strategic sense. It's not clear whether regulators would approve a deal that reduced the number of major players to just two or three.
Such an outcome isn't inconceivable, though. The Bush Administration has generally been willing to allow consolidation. And there's a precedent in the land-line business, where the number of giant players has been reduced to two. Should the economics of the wireless sector come to resemble the difficult environment of the land-line market, the structure of the wireless market could come to look like the land-line business, too.
Rosenbush is a senior writer for BusinessWeek Online, based in New York
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