Posted on: Sunday, February 22, 2004
Cell-phone giants not always assured of edge over rivals
| • | Chart: Comparing wireless carriers |
By Bruce Meyerson
Associated Press
NEW YORK — There are ways to measure a cell-phone company other than size.
With the taste of freshly spilled banking fees chumming the waters, Wall Street's sharks are preaching the lucrative gospel of "bigger is better" to the presumably hapless "little" guys like Sprint Corp., Nextel Communications Inc. and T-Mobile.
In reality, since Nextel and T-Mobile were already contending with a rival three times their size in Verizon Wireless, many strategists are not so convinced that the emergence of a competitor four times their size suddenly means they'll need to find their own merger partners to survive.
And months before the AT&T Wireless auction began in January, Sprint rebuffed a friendly proposal by Verizon Communications, industry sources familiar with the overture have told The Associated Press on condition of anonymity. While the Cingular deal promises to change the competitive landscape, not all industry observers would contend that Sprint needs to go rushing back into Verizon's arms. Sprint, T-Mobile and Nextel have adamantly maintained they can still go it alone. So has U.S. Cellular, a feisty player in smaller cities, with less than a tenth of the 46 million customers that a combined Cingular and AT&T Wireless can boast.
"When you define heft you've got to be careful," said Jack Rooney, president and chief executive of U.S. Cellular, which recently launched service in Chicago, its biggest market yet. "In five of the major markets where we've been for a number of years, we are the dominant carrier. In the sixth, we're tied for No. 1.
"We're up against five or six of (the national wireless carriers) in every market, so we've been very successful competing with these guys."
No doubt, there are advantages to corporate heft. By joining forces, Cingular and AT&T Wireless can spread the monumental costs of operating a single wireless business across a far larger customer base.
But Bruce Greenwald, professor of economic strategy at Columbia Business School, cautioned that the heaviest costs of a wireless business are concentrated at the local level. Geographic size can be a disadvantage if a company's customers are too spread out, a problem he sees with the Cingular-AT&T Wireless combination.
"The guys who are profitable dominate local markets. It's all local economies of scale," said Greenwald.
There will be savings in combining customer service, network and back office operations — eliminating the need for thousands of workers. Stores can be closed on streets and in malls where both companies have outlets.
Then there's added purchasing power with suppliers of cell phones and network equipment. And, having spent more than half a billion dollars each on advertising in 2003, the companies can choose to save substantial amounts by marketing a single brand.
Despite those benefits, there are mantras other than size in the telecommunications industry — bundled services, advanced features and specialization being among the most popular.
From certain vantage points, it's Nextel that has been the envy of the industry.
Nextel's 12.9 million subscribers pay among the highest monthly bills in the wireless industry, an average of $69 per month in 2003. And the company's churn rate, a measure of how many customers close their accounts, averaged just 1.6 percent per month last year.
By contrast, Verizon Wireless' 37.5 million customers generated an average monthly bill of just $49, though its churn rate was an impressive 1.8 percent. Cingular showed an average monthly bill of $51 with a churn rate of 2.7 percent, while the numbers at AT&T Wireless were $60 a month and 2.6 percent churn.
Nextel's strong performance stems from a long focus on high-use business customers, who are willing to pay more for special features such as the company's pioneering walkie-talkie service, which allows mobile workers to stay in constant contact.
"Nextel has always been a product company priced at a premium," Tom Kelly, chief operating officer, said Thursday in an interview. "We do not need to join forces with another company to compete and be competitive. We have to allow it as a possibility, simply because of how we represent our shareholders, but we do not manage our business based on the idea that we need to make an acquisition or be acquired."
Sprint has taken a similar approach to Nextel by differentiating itself with a snazzier lineup of handsets and advanced non-voice services such as picture messaging and wireless Web access.
As a provider of local, long-distance and Internet services, Sprint may hold another edge, as the trend toward discounted bundles of multiple services may make it very hard for even the best-run wireless-only player to compete.
