In addition to an expected jump in customer churn, analysts predict a huge financial burden tied to the implementation of wireless local number portability that eventually could ignite carrier consolidation rumors that have been simmering since the government relaxed spectrum cap rules last year.
A study by market strategy consultant iGillottResearch Inc. found that a 10-percent increase in customer churn associated with the implementation of WLNP could cost the industry more than $20 billion over four years. iGillottResearch founder and president Iain Gillott noted that while the figure represents a “worst-case scenario” for the wireless industry, the losses are possible since “nobody truly knows what the effect of WNP will be in the U.S.”
“It’s a worst-case scenario, but could it happen? Yes it could happen,” Gillott said, adding that the report also includes financial losses for smaller 1-percent and 5-percent increases in customer churn.
Gillott’s results are in addition to findings by the Cellular Telecommunications & Internet Association, which pegged the cost of WLNP implementation at more than $1 billion plus more than $500 million per year to maintain the mandate.
A report released earlier this year by Credit Suisse First Boston bolstered Gillott’s findings. It predicted customer churn would increase 10 percent in 2004 from its previous estimate of 2.6 percent to 2.85 percent, and jump another 15 percent in 2005, when more customer contracts expire.
Both Gillott and Credit Suisse First Boston referenced other countries’ experiences with WLNP when developing their projections, including Hong Kong, the United Kingdom, Germany and Australia.
Credit Suisse First Boston noted Hong Kong’s customer churn rate increased from less than 2 percent per month prior to the mandate to nearly 7 percent per month within a few months after WLNP was implemented. Few expect such a dramatic rise in the United States, noting Hong Kong witnessed the launch of four new carriers coinciding with WLNP and that the country’s exclusive reliance on GSM carriers allowed customers to easily take their SIM cards and contact information to a new operator.
Instead, most analysts expect the impact of WLNP in the states to be similar to what was experienced in a number of large European countries and Australia, where customer-churn figures spiked by as much as 50 percent immediately following the implementation of WLNP, and thereafter remained approximately 10 percent above pre-WLNP levels.
Gillott added that while WLNP’s effect on customer churn would be noticeable, he did not think the impact would be felt for at least six months after the mandate is implemented, now scheduled for Nov. 24.
“This is not going to happen on Nov. 25,” Gillott explained. “People have contracts, and I expect the systems will not be prepared to handle high traffic volume from day one.”
One possible scenario that could soften the blow for some wireless carriers would be the Federal Communications Commission’s approval of wireline-to-wireless LNP, which analysts predict could come by mid-2004. Gartner Inc. noted in a recent report that such a decision could have a greater impact than WLNP.
“The impact of such a mandate will be more dramatic than wireless number portability,” said Ron Cowles, research vice president for Gartner. “It will turn marketing strategies upside down and have a significant impact on customer calling patterns and areas, state and federal regulations, pricing and interconnection agreements, and product offerings and plans.”
Gartner added that nearly 10 percent of wireline customers will transfer their service to wireless providers once wireline-to-wireless number portability is implemented in addition to those that plan to migrate regardless of whether they get to keep their wireline numbers.
If the wireless industry does experience a worst-case scenario of more than $20 billion in additional costs to cover WLNP, Gillott said the industry could be forced into consolidation as most carriers would not be able to shoulder the financial burden on their own.
“If you add $20 billion to this industry, you have to have consolidation,” Gillott said. “It would make life very different.”
Gillott noted the consolidation scenarios probably would fall along technology lines with the most likely deals involving GSM operators including Cingular Wireless L.L.C., AT&T Wireless Services Inc. or T-Mobile USA Inc.
Last month Cingular and AT&T Wireless reported in government filings that they expect to pay $377 million and $380 million respectively over the next five years to implement WLNP, which was well ahead of previous forecasts the companies made in 2001, when they predicted the mandate would cost $250 million and $92 million respectively over five years.
In stark contrast to the wireless industry’s expected multibillion-dollar losses once WLNP is implemented, enterprise consultants are predicting the business sector stands to reap millions of dollars in financial rewards.
“Corporations have historically had very little leverage in cell-phone negotiations,” said Greg Carr, founder of telecommunications expense management firm Teldata Control. “With portability, this is a watershed moment for the pricing in that market.”
Teldata vice president Nick Wray added that it was important for companies to study how wireless carriers are going to proceed on pricing over the next four to six months, and that Teldata expects to accelerate its benchmarking of cell-phone contract data as a tool for its clients.
