In the past year, paging companies have engineered a striking makeover designed to change their “look” to better meet the business style of the new millennium.
Just as the parachute pants and spiked haircuts of the 1980s are out and the khaki pants and George Clooney hair styles of the 1990s are in, so have certain popular elements of yesterday’s paging industry disappeared to make room for a fresh new line. Today’s sexy company has coordinated a complex outfit of cause-and-effect layers and accessories put together with one goal in mind-money.
“The key figures of merit in any industry changes as it moves through various points of its life cycle,” said Ed Baker, chairman and chief executive officer of Arch Communications Group Inc. and 12-year veteran of the paging industry. “Capital markets are much more discerning, much more selective. The industry has changed … The growth rate, while still strong, has changed. There is new technology in the form of NPCS which requires more capital. The amount of capital it takes to be a major player has changed … I think Wall Street and investors want to see all the capital they invested beginning to materialize into cash flow and ultimately net income.”
As a result, the industry has seen seen fundamental alterations. It has matured from a “mom and pop”-structured growth phase to a consolidating corporate culture in which positive free cash flow and profitable growth is en vogue. Carriers are building out advanced messaging networks to offer services that bring in more revenue. They are raising prices and discarding accounts that do not make a profit. They’ve reorganized their operations for better cash efficiency and are consolidating to command greater economies of scale.
In the first half of this year alone, Paging Network Inc. and Arch have followed through with major restructuring efforts. Metrocall Inc. has taken a commanding lead in the consolidation drive, completing its integration of ProNet Inc. and announcing the acquisition of AT&T Wireless Services Inc.’s Advanced Messaging Division, making it the second-largest paging carrier after PageNet. MobileMedia Communications Inc., once a bankrupt mess, restructured under Chapter 11 bankruptcy protection, from which it is emerging with one of the lowest debt ratios in the industry.
In effect, paging companies that struggled for respect just two years ago no longer exist. They’ve created a whole new wardrobe, sometimes receiving rave reviews from industry critics.
“I think a lot of what helped the industry make a change was having strong management teams enter the business … who understood that in a competitive environment, long-term sustainability is dependent on (profitability),” said Jeanine Oburchay, associate director and paging analyst at Bear Stearns & Co. Inc. “Their number one priority now is getting to the point where they are profitable and generating cash flow.”
Central moves
One of the prominent leaders she mentioned was PageNet’s President, Chairman and Chief Executive Officer John Frazee Jr., who is leading the company through what is perhaps the most dramatic operational restructuring effort to date. In February, the company announced sweeping reforms that include a work-force reduction of 30 percent. The core goal of this effort is to relocate its many regional back-office functions-such as billing, customer support and inventory management-into centralized “centers of excellence.”
“PageNet was built and structured to maximize the growth opportunities in the industry. An example of that was our extremely decentralized facilities, designed to maximize the growth opportunity in each area,” said Doug Ritter, senior vice president of national accounts. Its many regional offices had extensive autonomy in sales, marketing, billing, customer support, inventory and other back-office functions to better attract subscribers.
But “growth-for-growth’s sake clearly didn’t lead to the pot of gold everybody expected it to,” he said. “We’re moving from a growth-for-growth’s sake environment to a profitability environment … That leads us into a lot of fundamental changes.”
Its restructuring process will consolidate some 60 to 100 decentralized offices nationwide. Ritter said this will make implementing new technology and training employees more effective and allow the company to realize greater efficiencies, as well as prepare for advanced messaging services.
“We think they’re required to help address these newer capabilities and services,” he said of the changes. “To provide enhanced services of content and delivery and full-featured calling options, these types of capabilities are almost impossible to deploy on a decentralized basis.”
Arch’s restructuring also focused on centralizing various functions.
“As the growth rate in the sector slows, you look for ways to be more efficient in a different growth mode,” said CEO Baker. “You put in place an organization that better reflects the growth in the industry and achieve economies of scale with the growth we’ve achieved.”
Beside consolidating operating entities, Baker also changed the way these working groups were measured, from a profit/loss basis to revenue growth and contribution margin.
“They’re doing the right thing,” said Darryl Sterling, paging analyst at the Yankee Group. “Paging is an incredibly difficult business, even though it may not look like it.”
He said carriers need to match three disparate areas of business to complete their outfit-basic messaging service, value-added services and also device inventory and order fulfillment.
“There are too many places where money can fall through the cracks,” he said. “I’d say the number-one reason (some carriers) went out of business was they didn’t have good back-office systems in place.”
The decentralized back-office systems of old were designed to realize greater subscriber growth, according to the carriers that implemented them. Growth occurred so quickly that carriers were unable to meet the pace of that growth and evolve more efficiently at the same time. The reason they are taking these steps today is because they finally can.
“I do believe the industry was moving so fast (that) they couldn’t stop and fix their back offices,” Sterling said. “With the resources they had, they couldn’t satisfy both the market demand and the internal demand … I think they were just responding to the dynamics of the industry at that time, and the main dynamic then was units. The money was not there to both push units and build the back office.”
A glaring example of the problems this can cause is what happened to MobileMedia. Its various acquisitions left it with a hodgepodge billing system that sent erroneous bills to resellers that refused to pay. The billing snafus were a major contributor to its filing bankruptcy.
According to Ron Grawert, MobileMedia CEO, those issues have been addressed in its restructuring process, which used a hybrid model of centralized and decentralized solutions.
The company’s billing, collections and purchasing operations have been unified onto one billing platform on a national level. However, management accountability was decentralized to five regional hubs. Executives at each are responsible for meeting financial goals, not just sales objectives.
“I think (MobileMedia) is substantially different now. Operationally, we’re as good if not better than anybody in the industry,” Grawert said. “We have achieved a lot in the last 18 months. I would stack our operations against anyone in the industry right now.”
Nimble players
For other industry players, such extensive reshuffling was not necessary. PageMart Wireless Inc., a relatively new player, was able to use its freshman status to implement a more progressive system from the get go, as it had no old structure to tear down.
“One advantage of being the new kid on the block is that were able to build our system from the ground up using the latest technolo
gy,” said John Beletic, PageMart chairman and CEO. “We just totally came in with a different model … For us, it’s relatively simple. For others, it’s more complex.”
That is not to say PageMart has not made changes. Beletic said PageMart is “dramatically different” from five years ago. “Our network then was a simple, classic paging network. Today, with the conversion that is underway, we now have an IP-based network.”
Money money money
More sophisticated networks require more sophisticated support.
“It’s much more capital intensive to manage it,” he said. “The product array is infinite.”
This transition to profitability is by no means over. Carriers are expected to take further steps as they move from free cash flow to achieving net gains. While NPCS services are expected to bring in more revenue, they also require more capital to support. Therefore, analysts expect carriers to make cuts in other areas down the line.
“One of the things I think is going to happen is that carriers are anxious to provide something like an Internet model,” said the Yankee Group’s Sterling. He said paging carriers will soon just provide service and let customers buy their own devices to receive the content.
To do so, “you need to get a device that can connect to any standard,” he said, meaning pagers must be made with the capability to be used on any frequency and on any protocol.
The reason for this, he said, is because device order fulfillment and inventory control drain cash flow. Already, paging carriers are distancing themselves from their device responsibilities. Many no longer lease pagers, and companies like PageNet and Metrocall are outsourcing their inventory management.
“These are signs that the carriers are trying to get away from the device business altogether,” Sterling said. “Now, they’re looking for alternate means of improving their bottom line.”
