Widespread consolidation among telecommunications carriers has concentrated buying power into fewer and fewer hands, with vendors experiencing many of the side effects.
In the last year alone, at least half of the carriers on RCR’s 1998 Top 20 cellular carriers’ list have been acquired by other carriers or financial investors. Six of those transactions have yet to close.
Before the wave of consolidation, the top five cellular carriers (AT&T Wireless Services Inc., SBC Wireless Inc., Bell Atlantic Mobile, BellSouth Cellular Corp. and GTE Wireless) on last year’s list controlled an estimated 48 percent of cellular subscribers in the United States. Today, the top five control about 53 percent of the cellular subscribers. Following the completion of all the pending mergers on the table, the top five carriers will control nearly 70 percent of U.S. cellular subscribers and the top 10 carriers will control about 80 percent of subscribers.
This picture may appear daunting to vendors trying to win telecom contracts. After all, fewer carriers equals fewer contracts.
Appealing contracts
Analysts, however, note that vendors actually could benefit from carrier consolidation because, although fewer contracts will be out there, the contracts that are available probably will have higher values.
“When one carrier combines with another carrier, the combined company has better buying power and will work with a vendor to buy larger deployments of infrastructure,” said Larry Swasey, senior wireless analyst at Allied Business Intelligence, Oyster Bay, N.Y.
Swasey also noted consolidation is being driven by large carriers’ need for coverage, and when a large carrier acquires a market, it has a vested interest in deploying as much equipment as necessary in that market to make it as competitive as possible.
“The idea is they are going into an area they think they can win,” said Swasey. “They will aggressively deploy infrastructure to maintain the subscribers they already have and to add new subscribers.
“The number of contracts will go down, but the size of the contracts will go up,” said Swasey.
Brian Cotton, senior analyst at Frost & Sullivan in Mountain View, Calif., said consolidation also is tightening buildout cycles. Traditionally carriers would build out aggressively, followed by a lull while they filled in holes, said Cotton.
Now carriers are building out at a more constant pace, and vendors will have to be able to live up to the increased production demands, he said.
Richard Siber, associate partner with Andersen Consulting in Boston, said the smaller number of contracts will put a different kind of pressure on vendors.
“What’s happening is the economies of scale kick in and carriers are looking for more aggressive deals in terms of cost and creative financing,” said Siber. “It’s a double-edged sword.
“On the one hand, you have fewer customers, but on the other hand, the stakes are higher,” he said. “There is more of a burden to perform. How a vendor handles an account becomes critical.”
Trying to increase their appeal to a smaller number of larger carriers has prompted some vendor consolidation. The impetus of this consolidation, however, is not the reduced number of contracts, but rather a strategy of vendors to offer one-stop shopping to their carrier customers.
The Lucent Technologies Inc. acquisition of customer-care and billing company Kenan Systems Corp. is a prime example of how vendors are trying to add competencies to their portfolios.
“There is a huge opportunity for outsourcing of services,” said Siber. “Vendors have an opportunity, if they align the right pieces of the puzzle.”
Price erosion
While carriers enjoy the economies of scale and enhanced buying power that consolidation creates, vendors may see the situation a little differently.
Truc Do, equipment analyst with SoundView Financial Group in Stamford, Conn., said price erosion will continue to be a factor.
“Vendors already are squeezing as much as possible out of their equipment in terms of pricing,” said Do. “Vendors are going to see strong volume shipments, but I don’t see any significant growth in terms of revenue growth.”
Do predicts revenue growth percentage will be in the mid-teens to low-twenties.
Acquisition anxiety
Another consequence of carrier consolidation that vendors-particularly smaller vendors-are experiencing is anxiety over whether contracts they have worked hard to win will be nullified if their partner is acquired.
“Vendors work for years to build up relationships and trust, and overnight they can be eliminated because the new parent company wants to work with someone else,” said Andersen’s Siber.
“The competitive structure historically has been that there are relationships between the top carriers and the top infrastructure providers,” said Cotton. “If a smaller vendor comes in and works out a deal with a carrier, and then that carrier is acquired, the surviving carrier probably already has preferred suppliers.
“It’s a concern for smaller companies,” continued Cotton. “Consolidation just means the bonds are getting tighter between the people at the top of the infrastructure provider and the service provider segments.”
