NEW YORK-Despite a positive outlook for wireless telecommunications over the next eight years, “our concern is about getting from here to there,” said Timothy E. Caffrey, director of corporate ratings for Standard & Poor’s.
“The industry has continued to surprise us. It keeps growing faster than expected,” he said last week at an investor’s forum on Communications and Media Finance, sponsored by The Institute for International Research, New York.
In 1993, projections were that cellular subscribers in the United States would total about 36 million by the end of 1997. Instead, the domestic wireless market closed out last year with 57 million customers, of which cellular accounted for 53.5 million, or 93.9 percent.
By the end of 2006, the total domestic subscriber base is projected to reach 145.6 million, with cellular subscribers accounting for 66 percent and personal communications services customers, 44 percent.
“The overall outlook is good, the business risk looks good, but the financial aspects are troubling because a lot of these companies are highly leveraged. Marketing costs $600 to $700 per net [subscriber addition], and the churn rate is 2 percent a month,” Caffrey said.
“It’s a capital-intensive business with high barriers to entry … and the incumbents have the best sales channels locked up.”
Unlike their wireline counterparts, wireless operators building out a network cannot scale up gradually to meet incremental demand growth, said Michael Elling, managing director of corporate finance for Prudential Securities Inc. This “all-or-nothing model” puts wireless carriers in need of disproportionately large amounts of capital early on in their corporate lives. Nevertheless, Elling is optimistic.
“Most analysts have [average revenue per subscriber] going down over time, but my analysis has it going up,” he said.
Selling large bundles of minutes in “all-you-can-eat” plans is the way to increase both usage and average revenue per subscriber over time. Microcell Telecommunications Inc., Nextel Communications Inc. and Paging Network Inc. have introduced calling plans at low rates for large amounts of use-’em or lose-’em minutes.
“Nextel has proven the model. PageNet and Microcell are screwing up, but we think they will get it right,” Elling said.
Bundled-minute plans promise to make the cost of PCS approximately the same as calling from a wireline home phone, he added.
“No PCS carrier has ever produced a chart like this,” Elling said, referring to a comparative pricing illustration he presented.
“They’re out there with their big bucket (of minutes) plans, but the consumer doesn’t [realize] what he’s getting.”
Calling party pays, which must surmount various regulatory hurdles before it becomes a reality in the United States, also is a sure-fire way to increase minutes of use, Caffrey said.
“Technology hasn’t shown itself to be a big differentiator that moves customers, although digital has some cachet. But [Code Division Multiple Access] may have an advantage over the long term because of the greater capacity it offers that will be needed with calling party pays,” he said.
CDMA is an example of how technology fights in this country created “Balkanization” in standards but also resulted in breakthroughs that otherwise would not have happened, Elling said.
“CDMA became a digital overlay over analog. Third-generation wireless will be a problem because GSM has always been on virgin spectrum,” he said.
