Editor’s Note: In a new series, RCR Wireless News takes an in-depth look at nationwide wireless players, including their strengths and challenges in an ever-changing wireless environment. In this third installment, RCR Wireless News reporter Hilary Smith tackles the nation’s third-largest carrier, AT&T Wireless.
As wireless stocks steadily descend into the depths of despair amid lingering uncertainty about the uptake of third-generation services, Redmond, Wash.-based AT&T Wireless Services Inc. is faithfully moving ahead with plans to become technologically in sync with much of the mobile world.
The nation’s largest TDMA carrier and third-largest U.S. carrier overall with approximately 20 million subscribers, AT&T Wireless has weaned itself during the past few years from parent AT&T Corp. to become a completely separate and independent entity in July 2001. Today the company is in the midst of a massive network overlay that will replace TDMA with GSM and 2.5-generation GPRS technology. In turn, AT&T Wireless customers will get the mLife they never knew they needed.
If you were one of the millions of people who saw the debut of AT&T Wireless’ new brand campaign during this year’s Super Bowl and thought it was advertising insurance, you were not alone. The elusive ads were designed to make a bold break from the industry’s obsession with plans, prices and promotions, according to John Zeglis, the company’s chairman and chief executive officer.
An “mLife” is made possible by AT&T’s expanding GSM/GPRS network, which in addition to enabling voice service, supports Internet access, short message service and e-mail at higher data speeds than CDPD, which is currently available to about 1 million AT&T customers on its 850 MHz cellular network only.
GPRS service already is available in several cities, including Detroit, Chicago, Las Vegas, Phoenix and Seattle-the city where it was first introduced in July 2001-and by the end of the year the network should be up and running nationwide, the company said.
“We are on time, on track and on budget in terms of the building out of the new network,” said Mohan Gyani, president of AT&T Wireless’ mobility unit.
For $50 per month a GPRS subscriber receives 400 voice minutes and 1 Megabyte of data. It marks the first time in most analysts’ eyes that a U.S. carrier is proactively charging for data, which also makes the company a guinea pig for other carriers. If the offering succeeds, other carriers will surely follow suit. If the offering fails, AT&T wireless will be left to lick its wounds while other carriers try a different approach.
“Trial and error may be the only way to truly discern what the U.S. wireless purchaser wants from a wireless data service,” said analyst firm The Yankee Group.
GSM/GPRS is only a stop on AT&T Wireless’ journey to a true 3G network. Eventually the company plans to migrate the GSM/GPRS network to EDGE and then to UMTS. EDGE is expected to be a short stop, one that most European GSM carriers are skipping altogether, in part to save money.
Indeed, the cost of providing an mLife will not be cheap. Soundview Technology Group estimated the TDMA/GSM/GPRS/EDGE/UMTS transition could cost around $4 billion over a three-year period. Zeglis confirmed these predictions in December, saying the company expects to spend $2.5 billion on the GSM/GPRS upgrade, a few hundred million on the EDGE upgrade and another $1 billion on the final upgrade-all this in addition to the cost of keeping up its existing TDMA network throughout the transition.
“That’s one of the biggest risk factors in this stock,” said Tim O’Neil, wireless analyst with Soundview. “We’re very comfortable with the execution on a quarterly basis, however, the long-term risk of managing multiple networks and multiple technologies has been enough for us go to a `neutral’ rating on the stock. We are a big proponent of wireless data being used as a differentiator in the wireless industry to get carriers away from the downward spiral of competing on price alone, however, we remain skeptical the GSM/GPRS service that will be introduced will be able to compete with the 1x networks being launched by Verizon (Wireless), Alltel and Sprint PCS.”
“I would like to have seen them take a different path several years ago,” he added.
Bear Stearns & Co. Inc. noted AT&T Wireless’ overlay will cost significantly more than its CDMA counterparts. The firm estimated the carrier will have to spend $65-$90 per pop to upgrade from TDMA all the way to UMTS, and it does not believe its free cash flow-to-equity will turn positive until 2005.
AT&T Wireless ended 2001 with $3.6 billion in cash and $3.2 billion in available credit.
Asian influence
With so much invested in the network, AT&T Wireless is taking steps to ensure it will be put to frequent use. In November 2000 NTT DoCoMo, the wireless world’s most dominant data force, bought a 16-percent stake in AT&T Wireless for $9.8 billion. DoCoMo is working with the carrier to develop mobile data applications that U.S. consumers will hopefully love, using technology that brings AT&T Wireless closer to NTT DoCoMo’s standard of choice, wideband-CDMA (aka UMTS).
“We wanted to learn about what has made their wireless data offering so successful in Japan, and how we can translate that … to the U.S. marketplace,” Gyani said. “It’s been a very valuable partnership.”
As part of the agreement, AT&T Wireless licensed NTT DoCoMo’s i-mode technology platform, which is used by more than 30 million Japanese wireless subscribers, and in April, AT&T Wireless launched mMode, the company’s own version of i-mode. Unfortunately, mMode so far has not been as compelling as its Japanese counterpart.
Analysts doubted from the beginning the compatibility of an i-mode-type service with U.S. wireless users who were raised on the wired Internet experience of fast data speeds and big, colorful screens.
Wireless industry expert Andrew Seybold noted in his analysis of the new service that mMode is offered on a standard WAP phone that also must be GSM/GPRS capable. In other words, TDMA users will have to buy a new handset. Also, mMode is available in only 14 metro areas.
“As far as I can determine,” Seybold said, “AT&T Wireless has simply made WAP sites that are available on its CDPD system available on its GSM/GPRS system for more money. Perhaps I missed something, but this sure looks like the same old Internet translated to WAP and displayed on a small-screen monochrome phone.”
The anti-climactic mMode launch was disappointing, but it stands out in part because the company has had few major slip-ups in recent years. The New York City capacity problems in 1999 also garnered a lot of attention. AT&T was signing on customers so fast, the network couldn’t handle the call volume and complaints poured in over dropped calls, poor quality and busy signals. Over time the problem was fixed.
In lieu of these issues, the company’s successful initial public offering, the acquisition of TeleCorp PCS, its joint venture with Cingular Wireless to build out rural networks and the introduction of one-rate pricing have helped give AT&T Wireless the reputation as an innovator.
Friendly competition
AT&T Wireless is known for taking risks, starting with the revolutionary Digital One Rate campaign in 1998. Under the guidance of then-CEO Dan Hesse, the company changed the way carriers priced calling plans, and it opened consumers up to the idea that wireless phones could be used for more than emergencies and local calls.
“All hell broke loose if a memo went out mentioning Digital One Rate and somebody had it that wasn’t supposed to. We knew we had something special,” Hesse said in 1998.
Digital One Rate allowed subscribers to call anyone anywhere fo
r a single per-minute price. Other carriers offered similar plans, but AT&T Wireless introduced the first truly “no strings attached” one-rate plan.
No roaming or long-distance fee pricing had be
en tossed around the company when it was still McCaw Cellular Communications Inc. AT&T Corp. purchased McCaw in 1994 for $11.5 billion, creating AT&T Wireless Services, a business unit of AT&T.
AT&T Wireless aggressively bid for PCS licenses in the mid-1990s and acquired several smaller carriers, such as Wireless One and Vanguard Cellular, along the way to build out its footprint. A tracking stock was issued in April 2000, raising $10.3 billion and signaling to the industry AT&T Wireless would soon be on its own.
The company also started an affiliate program to build out its PCS licenses in small cities and rural areas. AT&T Wireless acquired TeleCorp PCS, one of the largest affiliates with about 1.1 million customers, in February for $4.7 billion.
AT&T Wireless told analysts several months ago it wants to have complete GSM/GPRS coverage and consolidated control of the network covering 75 percent of the population. In the other 25 percent of the country, AT&T wants to use either joint ventures or conventional roaming agreements to provide coverage.
The TeleCorp PCS acquisition was a move to gain control of a section of AT&T Wireless’ network and make the technology migration run more smoothly. TeleCorp PCS’ valuation also was down at the time of purchase, making it a bargain for AT&T.
In another savvy move to swiftly and inexpensively expand its network, the company entered an agreement with Cingular Wireless in January to jointly build out a GSM/GPRS network along 3,000 miles of interstate highways in the Midwest and West. Such cooperation instantly sparked rumors about consolidation, and although Gyani said he thinks consolidation is inevitable, he clearly stated the two are still “fierce” competitors.
Of the joint venture, Gyani only said, “We both have a desire to have our customers roam there.”
Staying focused
Of all the carriers, AT&T Wireless is still the darling of investment advisers.
“We believe that this is still the most defensible stock in our universe,” said Robertson Stephens in March.
And although the stock has dropped to single-digit prices along with the rest of the major wireless carriers-especially since WorldCom Inc. revealed its devastating $3.8 billion accounting error-the success of its IPO coupled with low subscriber churn, strong service revenues and an on-time GSM/GPRS network deployment schedule have for now positioned the company well among the competition. AT&T Wireless added 650,000 subs in the first quarter this year.
AT&T Wireless also does not have spectrum worries like other carriers. It maintains on average 25 megahertz of spectrum in its cellular markets and 10 megahertz of spectrum in its PCS markets, and the company has acquired additional spectrum through acquisitions and joint ventures.
“We have all the spectrum we need to go up to EDGE in the top 100 markets in the country. Do we need more? Someday in the future, yes, but is our back against the wall? No,” said Gyani.
“Our single focus is to make sure we keep our eye on the ball from an operational standpoint,” he said.
Gyani said the company needs to increase market share in terms of subscribers and revenues and make sure it is positioned for long-term, sustainable success.
Completing the GSM/GPRS network overlay will be a priority throughout the rest of the year.
“We’re happy to stay focused on the nuts and bolts here,” said Gyani.
