The traditional paging industry is dead, many analysts and paging veterans agree. But there is an escape route for the few companies left fighting, though many industry observers agree more consolation will take place and not everyone will make it to greener pastures.
The recent collapse of TSR Wireless L.L.C., Paging Network Inc. and MobileMedia Corp. are prime examples of the shaky ground on which former paging companies now stand. These bankruptcies are a clear signal to those that are left, including Arch Wireless Inc., WebLink Wireless Inc. and Metrocall Inc., that there isn’t much time left to make some serious changes. And fast.
However, the only avenue out of bankruptcy left open to the old paging players is the promise of two-way messaging, those in the industry agree.
“They have to put their hopes in the two-way,” said Elliott Hamilton, director of the global wireless group at The Strategis Group. “They don’t have anywhere else to go.”
Hamilton said he believes the two-way market is profitable enough to make up for the companies’ losses in the one-way messaging market. The Strategis Group estimated there could be more than 11 million two-way units in use by 2004, with total revenues of $3.1 billion. However, Hamilton said, not everyone will share the wealth.
“I see the industry continuing to consolidate,” he said.
When that consolidation will happen is anyone’s guess. Donald Longueuil, an analyst with the Yankee Group, said there will likely be a “cooling-off period” following last year’s bankruptcies, but he wouldn’t make a prediction as to when the next round of big moves will occur.
“I think there will be another fairly active shakeout period,” he said.
As Arch, WebLink and Metrocall stand today, the next shakeout could be soon. WebLink recently released a devastating fourth-quarter report; Arch faces a possible delisting from the Nasdaq National Market; and Metrocall got kicked down to the lower-tier small-cap market listing in February.
After the company released its fourth-quarter results, WebLink’s stocks dropped almost 50 percent-and for good reason. The report included huge drops in sales, dire warnings for the year to come and 125 layoffs. Perhaps the worst news is that WebLink needs an additional $70 million in capital by the second quarter of this year to be fully funded for the year. If the money doesn’t come, WebLink will have “liquidity difficulties and its business and financial condition would be materially adversely affected,” the company said in its statement. WebLink too faces a possible delisting from the Nasdaq National Market.
WebLink’s news earned its stock an “avoid” rating from Tejas Securities Group Inc., which recently released its “Paging Industry Report.”
“The company that is most in danger of filing for bankruptcy is WebLink,” the report stated, citing WebLink’s need for additional money to cover this year’s expenses. Even worse: “We believe WebLink Wireless Inc. will be unable to survive as an independent company.”
However, WebLink has the backing of a powerful shareholder, Morgan Stanley, and rests on a “high-quality network” to make the transition to two-way messaging, according to the report.
While WebLink seems to be in the worse financial situation among the former paging companies, Tejas said Arch is in the best position to survive a possible consolidation process.
“Who will be the last man standing? Currently the odds favor Arch,” the report said.
Arch received $250 million for the sale of its specialized mobile radio licenses to Nextel Communications Inc. and continues to make gains from its recent merger with PageNet. And just last week, Arch released its report for the fourth quarter, showing net revenues increasing 46 percent to $279 million from the same period in 1999.
“We continue to make good progress in our wireless Internet messaging and mobile information business,” said C. Edward Baker Jr., Arch’s chairman and chief executive officer, during a conference call.
Chet Lasell, Arch’s director of corporate communications and investor relations, said Arch is confident about the coming year and its two-way messaging business.
“We expect to add approximately 400,000 (two-way) subscribers in 2001,” he said.
Arch changed its name in September from Arch Communications Group to Arch Wireless to reflect its “transformation from a traditional paging and messaging company to a leading provider of two-way wireless Internet messaging,” according to the company’s fourth-quarter report. Lasell said Arch also revamped its business plan last year to focus on selling its two-way services to businesses, adding consumer partners like America Online Inc., and expanding into new media like e-commerce and wireless advertising.
In addition, Lasell said Arch’s ReFLEX network will be upgraded in the later part of this year, and will see a 10-fold increase in capacity and its latency improved from 60 seconds to 15. The new network will cover 90 percent of the nation’s population.
“The thing that sets us apart from our competitors is the network we have,” Lasell said. “ReFLEX is the way to go.”
However, according to Tejas, not all is well with Arch.
“It also had crushing debt, a severely top-heavy balance sheet and operating challenges aplenty in stabilizing its traditional paging churn rate,” Tejas said in its report.
Standard & Poor’s echoed Tejas’ concerns, giving Arch’s senior unsecured debt and preferred stock a preliminary rating of CCC. S&P’s said the prospects for the company’s two-way business were uncertain and the potential for growth in its operating cash flow was limited.
Finally, Metrocall isn’t immune from the problems facing Arch and WebLink. According to Tejas’ report, “Metrocall has no proprietary two-way messaging network as an asset to cushion bondholder’ returns in a bankruptcy scenario.”
“Metrocall is going to have a tough time in the wireless arena without a network,” the Yankee Group’s Longueuil said.
Longueuil said the problem most older paging companies face is not a capacity, technology or service issue, it’s a marketing issue.
“The problem with WebLink, and ultimately Arch as well, is they need to improve their marketing,” he said. “Right now, I think it’s a marketing issue.”
Longueuil said Research In Motion Ltd.’s BlackBerry device is basically the same as those offered by Arch, WebLink and Metrocall-typically Motorola Inc.’s T-900-but the BlackBerry has a much better marketing strategy behind it. Also, the applications for the BlackBerry are generally better, a problem Longueuil blames solely on Motorola.
“The services are much more enhanced in terms of the applications you can run on the device (BlackBerry),” he said. “They (Motorola) don’t allow any other manufacturers to run on ReFLEX. They want to keep everything proprietary. … Motorola almost micromanages these guys (messaging companies) in terms of what services they offer.”
As for who is in the lead in the two-way game, Longueuil said the winner is SkyTel Communications Inc., which has the backing of telecommunications giant WorldCom Inc. SkyTel got the jump on other messaging companies, launching its two-way messaging service in 1995.
“SkyTel is the biggest out of all of them,” Longueuil said. “SkyTel kind of has the upper hand.”
While many are sure of more consolidation in the messaging industry, no one is sure when or how. Tejas admits any of the old paging companies could merge with or acquire each other, but it also speculates about outside interests. WorldCom, which uses a ReFLEX network, could be a potential suitor. Nextel might be interested and a personal digital assistant manufacturer like Palm Inc. or Handspring Inc. could buy up a failing company.
But one thing is for certain, Longueuil said. “The one-wa
y alphanumeric paging service is declining more rapidly than anyone had anticipated. The subscriber declines are just astronomical,” he said. “The
industry’s trying to reinvent itself.”
