Wireless Carrier Market Prime for Consolidation

Observers say mergers could result in better coverage for customers.

By Jennifer Mears, Network World Inc. - 9/02/02

With the economy dragging and the federal government preparing to lift spectrum caps, wireless carriers are doing a dating dance that could lead to a market consolidation that analysts have been expecting for some time.

The thought is that the six national carriers operating today - Cingular, AT&T Wireless, Nextel, Sprint PCS, Verizon and VoiceStream - will be boiled down to four or five big players. Industry watchers say consolidation will have little effect on business customers' contracts, but expect it will result in broader coverage and better services as carriers combine resources.

"Enterprise customers should expect change. But I don't think consolidation is going to be a price story. It will be a quality and capacity story," says Jeff Kagan, an independent telecom industry analyst based in Atlanta. "It will be about companies getting healthier and being able to provide more applications because they have more spectrum and more bandwidth. It's about an industry that's maturing."

Rumors about consolidation have been swirling this summer, with talk initially centered on a possible acquisition of VoiceStream by AT&T Wireless. Today, VoiceStream, the U.S. wireless subsidiary of Deutsche Telekom that is being transitioned to the T-Mobile name, is reported to be in preliminary merger talks with Cingular, which already uses VoiceStream infrastructure to provide services in New York.

Talks are at a very early stage, but analysts say they wouldn't be surprised to see deals coming to fruition shortly after the first of the year, when the Federal Communications Commission is slated to lift its spectrum limitations. Until then, any merger between the leading carriers would result in capacity that violated those caps.

"Since the mid-'90s, wireless has been the poster child for competition. There was just so much growth, and so many competitors and regulators pointed to it as this perfect model," Kagan says. "But there can be too much of a good thing. At this point we have too many competitors.... They're slicing up the pie too thin."

Struggle for profits

While the number of wireless subscribers continues to grow - albeit more slowly than in the past - carriers are finding it harder to turn profits. The carriers are challenged because increased competition has resulted in price wars that have led to services such as long-"distance and roaming being bundled into plans for free. In addition, the carriers all are focused on the costly task of building out their networks to support next-generation services. The hope is that new services, such as data transmission, will provide the additional revenues the carriers need, but adoption has been slow.

In the meantime, wireless companies have seen their stock prices plummet along with the rest of the telecom sector, and that is helping to spur a move toward consolidation.

Deutsche Telekom has confirmed that it is considering a sale of VoiceStream, which it acquired last year in a cash/stock deal initially valued at about $50 million. Today, the German telecom company reportedly is considering off-loading VoiceStream to help raise some $6.9 billion it needs to meet its debt targets. Analysts say VoiceStream would fetch only between $10 million and $15 million.

"It's one of the strongest examples of buying high and selling low," says David Chamberlain, research director for wireless Internet services and networks at Probe Research."Overall, weakness in the market is driving people to look [for merger or acquisition opportunities]."

Analysts say VoiceStream, AT&T Wireless and Cingular are the three wireless carriers most likely to be in play at this point because of their focus on GSM and General Packet Radio Service (GPRS).

"AT&T and Cingular don't have enough spectrum for the technology they're using," says wireless industry analyst Andrew Seybold, of Andrew Seybold Group.

"Now that the federal government has said there will be more spectrum available in 2008, they're realizing the only way they're going to be able to get enough spectrum is to acquire somebody or merge with somebody," Seybold says.

In the meantime, carriers are looking for ways to drive down expansion costs. Partnerships have formed. Last year, Cingular and VoiceStream entered into a deal in which they share infrastructure, letting Cingular offer services in New York City and VoiceStream to provide service in California and Nevada. In January, Cingular announced a joint venture with AT&T Wireless to build out next-generation network coverage along 3,000 miles of interstate highways in the West and Midwest.

When considering consolidation, several issues come in to play, including the technology the carriers are using. As the carriers upgrade their networks, they are taking different routes.

Other factors that will affect mergers are where carriers might have gaps in coverage and how a merger could help fill those holes.

"The thing to remember is everything is rumors at this point. And there will be more and more rumors," Seybold says. "But the real question is whether six [national] carriers can survive. That indicates that there will be consolidation in the marketplace. The question is who's going to buy whom and for how much."

Reprinted with permission, Network World Inc.