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LOTS OF MILEAGE LEFT FOR PAGING INDUSTRY

NEW YORK-Borrowing a tag line from a recently released report of the Paging Leadership Association, industry representatives and analysts say there is “no grim reaper for the beeper.”

The association, comprised of the 13 companies that represent 73 percent of the United States paging market, reported 1996 results based on feedback its members provided to KPMG Peat Marwick L.L.P.

More than 7.1 million new paging subscribers were added in this country last year, the largest increase ever reported, and average monthly churn rates dropped to 2.69 percent, the lowest in the seven years this annual survey has been conducted.

[Worldwide], “paging has grown at a 33 percent compound rate over the last five years, and there will be 400 million subscribers by 2000. Penetration is low,” Chris Galvin, chairman of Motorola Inc., said. “It has the ability to deliver the lowest cost message available to the industry. We think there is a lot of growth left in paging despite the addition of messaging to voice.”

C. Edward Baker, chief executive officer of Arch Communications Group Inc., said, “the sheer laws of physics will prevent any competitor that optimizes its system for voice from providing reliable paging. As they seek frequency reuse, they turn down the power, and they don’t get in-building penetration.

“So that I don’t appear absolutely naive, you can page over those channels, and there will be a small, de minimus piece of the market that migrates to PCS.”

One key indicator that prospects for paging look good, Baker said, is the entry of new pager suppliers within the last few years. Motorola Inc., which virtually had the market to itself, now has about a 75 percent domestic market share.

“One of the concerns I’ve had since I’ve been in the industry is that our bargaining power never has been as strong as I would like. With one vendor, it’s hard to have leverage,” he said. “But that’s changed over the last year or two, and we’ve seen new companies, some I’ve never heard of and others-not very small companies-like Philips, Samsung and Sony.”

At the same time, Motorola’s decision to make available its FLEX protocol is promoting a drive toward open architecture and is “sweeping not only the U.S. but the world,” Baker said. “The FLEX protocol is robust, has increased our capacities and allows us to migrate our networks to higher transmission speeds.”

John Beletic, chairman of PageMart Wireless Inc. and president of the Paging Leadership Association, said he believes that two-way paging will enhance one-way alphanumeric service. Alpha paging in the United States is growing three times as fast as numeric paging and is expected to comprise more than half the market in seven years, up from 12 percent today, he said. Narrowband personal communications services, in their initial phase, will serve as a, “low-cost, high quality, user friendly substitute for one-way,” he said.

Michael Elling, senior telecommunications analyst for Prudential Securities Inc. said he sees the paging industry in the same place the personal computer industry was in the 1980s: on the verge of an “upward spiral” with prospects that are “awesome.”

“There is a lot of mileage left in one-way paging,” Elling said, adding that he views two-way paging as a promising but more complicated proposition for carriers.

“That Glenayre and Wireless Access would come together is a recognition that the evolution to two-way is far more complex and challenging than was believed,” he said. “As you go into two-way, there are no cheap beeps.”

Another testimony to the tricky nature of two-way messaging is the decision by Mobile Telecommunications Technologies and Paging Network Inc. to resell each other’s products. “This proves that the evolution of two-way platforms is riskier and costlier than first believed, so it’s a good idea to spread the risk,” Elling said.

For Jeanine Oburchay, associate director of Bear Stearns & Co. Inc., PageNet’s decision to resell M-tel’s advanced messaging services was a smart move for another reason. By effectively adding M-tel’s sales force of 500 to its own, PageNet gained the scope to continue as a leader in the industry, she said.

Bear Stearns late last month, “upgraded a large part of the paging group because they are better than ever before, especially in terms of financials,” she said. “Wall Street stopped rewarding paging companies for subscriber growth about a year ago and started focusing on the financials, on whether a customer generates positive free cash flow.”

PageNet now is talking about raising prices, a move that would create a pricing umbrella for the other carriers, Oburchay said.

One result of ongoing industry consolidation, is that, “the overheated pricing, the craziness in the market” has given way in the last six months to “price stabilization,” said William L. Collins III, chief executive officer of Metrocall Inc. Price wars hurt the industry and its valuations, he said.

Metrocall Inc., which has about 4 million subscribers, has pursued an acquisition strategy and was the largest industry consolidator last year, he said. At the same time, it has low leverage on its bank debt and an expansive credit line, he said.

As a consequence of industry consolidation generally, about half of all the paging subscribers in this country today are customers of the top five paging carriers, he said.

“You need scale and scope and nationwide licenses,” said Collins, whose company, like PageMart, is pursuing NAFTA region international paging. “The regional players, all those with fewer than 300,000 pagers, don’t have much of a future as stand-alones.”

Arch, with nearly 4 million subscribers, has so far been engaged in 34 acquisitions, Baker said. “Whether Arch continues to be a consolidator depends on what’s right for our shareholders-whether to acquire or to be acquired,” he said.

Within the next two to three years, Baker said he believes the top five paging carriers will control at least 80 percent of the United States market, compared with 50 percent today. “The industry will define itself into an orderly oligopoly,” he said.

PageMart, which now has 2.2 million subscribers, has built its customer base solely on internal growth. According to Beletic, PageMart has been the fastest-growing paging company in the United States in the last five years.

With respect to the investment community, PageMart’s problem, if it can be called that, is this: “We’ve had some big [institutional] investors who wanted to take a big position and couldn’t get the stock,” Beletic said Sept. 30. “But a half-million shares traded yesterday, and we see some more opportunities for buying our stock.”

On the other hand, Samuel L. May, a research analyst for Pacific Growth Equities, said he has stopped following paging stocks. “Paging has started to rebound in the last six months, but the stocks are still pretty low,” May said. “It has plenty of legs as a cash flow business, but it won’t experience high growth.”

Oburchay of Bear, Stearns said that assessment may be overly simplistic, in her view.

Asked who are the paging investors he sees today, Elling of Prudential said, “I’ve had some bottom fishers, a few momentum players.”

To drum up interest, a big event that catches attention in paging is needed, he said. “If you had a major strategic player, an inter-exchange carrier or a major equipment vendor putting its footprint into paging, investors would take a look at the sector,” Elling said. “If I’m telling you this, don’t you think I’m working on it?”

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