Rural cellular carriers have been reaping generous roaming revenues from nationwide operators since the advent of one-rate plans, but investors in recent weeks have been concerned that this trend is slowing.
Rural cellular stocks, which recorded spectacular gains in 1999, have taken a hit since United States Cellular Corp. and Alltel Corp. said they felt the pinch from AT&T Corp.’s affiliates launching service in their markets. The affiliates will capture all of AT&T’s roaming revenue following their launch of service.
Roaming revenue for many rural carriers accounts for about 25 percent or more of their total revenues. Carriers like Dobson Cellular have seen an 80-percent year-over-year growth in roaming in some markets.
Large carriers like AT&T have threatened rural operators for some time, claiming they will launch service in their markets or will use intelligent roaming to keep minutes away from them if they don’t lower their roaming rates. Some rural carriers like Rural Cellular Corp. have responded, choosing to build a business model that accounts for a gradual decrease in per-minute roaming rates. Others such as U.S. Cellular have remained steadfast in keeping its per-minute rate higher, a move that now has forced U.S. Cellular to take a dramatic per-minute price cut, say analysts.
“Some investors were looking at this pot of gold as if that was going to stay this large on a per-minute basis for a long time,” said Perry Walter, vice president with Robinson-Humphrey Co. in Atlanta. “That unfortunately rubbed off to the more roaming-friendly carriers … Until carriers report good numbers later, there’s going to be some pressure.”
Many analysts believe investors are ignoring the fundamental strength of rural cellular carriers. These carriers, like other large carriers, are seeing strong domestic growth but with fewer competitors in their markets. Operators like AT&T still have plans to acquire smaller players to fill in their footprint and eliminate roaming fees altogether.
“The compelling proposition for anywhere, anytime communications is no less appealing in rural areas than in cities,” said David Freedman, analyst with Bear, Stearns & Co. in New York.
The decline in stocks has uncovered some opportunities to buy at lower prices, say analysts. Western Wireless Corp., according to Warburg Dillon Read, has a higher level of immunity to roaming rate pressures given the low level of competition it faces. It’s also trading at a 17-percent premium to its cellular counterparts. Deutsche Bank’s top picks include Price Communications Inc., which reported strong fourth-quarter results; Western Wireless; Dobson Communications Inc.; and Alltel.
While investors became nervous with Alltel’s lower roaming revenues in the fourth quarter, they have greatly ignored its recent agreement with Bell Atlantic Mobile. Alltel, BAM and GTE Wireless earlier this month agreed to swap wireless markets in 13 states. In doing so, Alltel and BAM signed a new national roaming agreement that will allow their customers to roam on each other’s networks at reduced rates across a footprint that covers almost 95 percent of the country.
“The Bell Atlantic/Alltel swap will help both companies start making a bigger push to eliminate roaming charges to a larger mass of people,” said Freedman. “For example, only 20 percent of AT&T’s customer base is DOR (Digital One Rate). The other 80 percent is still paying 60 cents to 99 cents. If Bell Atlantic starts pushing down rates, we could see minutes of use from that 80 percent.”
The question remains: Will the big revenues from roaming go away? Dennis Leibowitz, director of media and communications research with Donaldson, Lufkin & Jenrette, believes an increase in usage from national rate plans will more than offset the decline in per-minute rates. But this may only be true for the roaming-friendly operators that have worked to gradually lower their roaming rates. U.S. Cellular is likely to report lower roaming revenues in the quarters to come.
“Roaming-friendly stocks that have been wisely and gradually moving rates down will be rewarded over the next three to six months,” said Walter.
Intelligent roaming technology, which gives carriers the ability to move roaming minutes from one carrier to another in a given market to drive down per-minute rates, is a threat to carriers wanting to keep their high roaming rates. Though all handsets sold today incorporate this technology, it may take another three to four years before the majority of handsets in the existing customer base can take advantage of the technology, said Freedman.
“The misperception that all phones have this capability is one of the things hurting the stock,” said Freedman.
