AT&T Wireless Services Inc.’s presence in the wireless industry is set to come to an end sometime later this year when Cingular Wireless L.L.C.’s pending $41 billion acquisition of the nation’s third-largest operator is set to close. Along with the reduction in number of nationwide competitors, the demise of AWS will leave the wireless market devoid of the AT&T moniker since its brief foray in the early ’80s and its constant presence since the company acquired McCaw Cellular in 1994 for $11.5 billion.
While few questioned the need for wireless consolidation, AWS’ position as the first carrier to cry uncle, as well as how quickly the process was completed, caught some by surprise.
“It shows how competitive the industry is,” said Roger Entner, program manager of wireless and mobile services at the Yankee Group. “Two bad quarters and you’re out.”
Prior to its spinoff from AT&T in mid-2001, AWS was regarded as one of the top carriers in the country including top placings in a number of customer satisfaction surveys as well as being considered a marketing leader with the launch of its Digital One Rate plan, which its competitors soon copied. Analysts also noted that until Verizon Wireless began pushing its claims of having the best network, AWS unofficially held the title.
“They were the Verizon before there was a Verizon,” Entner noted.
AWS’ star began to dim prior to its spinoff from AT&T Corp. when in 2000 Verizon Wireless was formed from Vodafone AirTouch plc, Bell Atlantic Mobile and GTE Wireless, and when Cingular brought together SBC Communications Inc.’s and BellSouth Corp.’s wireless properties, dropping AWS from its perch as the nation’s largest carrier-a position it had occupied since the mid-1990s. Further pressuring AWS was rapid growth from smaller nationwide players Sprint PCS, Nextel Communications Inc. and VoiceStream Wireless Corp.-since renamed T-Mobile USA Inc.-that led to an increasingly competitive market.
While AWS managed to maintain its third position in the wireless market and for a time make inroads on Cingular’s second-place spot, analysts noted AWS was increasingly losing its identity in the eyes of consumers. Verizon Wireless rallied around its position as the nation’s largest operator. Cingular increased ties with its wireline parent companies to push bundled services. Sprint PCS was moving aggressively in the data market. Nextel had become the destination for business customers thanks to its Direct Connect walkie-talkie service. T-Mobile USA became the pricing leader.
AWS attempted to remake itself with its mLife campaign, launched during the 2002 Super Bowl. Critics noted the campaign proved confusing to consumers since they lacked visual clues as to what AWS was selling and it did not tie-in well with consumer awareness of the company.
Adding further insult to AWS were reported network integration problems associated with the overlay of its legacy TDMA network with GSM technology. In a number of markets AWS was forced to install GSM services in its PCS spectrum due to the lack of cellular GSM equipment. Customer satisfaction surveys indicated it hurt the carrier’s perceived network coverage.
Further soiling the carrier’s public perception was a highly publicized software problem last October that delayed AWS’ ability to add customers to its GSM network, which bled into integration issues with its local number portability vendor that held-up porting requests and eventually led to an Federal Communications Commission inquiry.
Those issued manifested themselves in AWS posting the highest customer churn and slowest customer growth of its competitors during the fourth quarter of last year. AWS acknowledged the difficulties in its annual 10-K filing, noting “our net subscriber growth has been impacted by adverse publicity concerning our network quality, customer-care issues arising out of difficulties we experienced upgrading our customer-care systems and publicity surrounding numerous complaints arising out of difficulties we experienced implementing LNP in late 2003.”
Analysts noted those issues left AWS’ management with few choices.
“They saw the writing on the wall and decided it was not worth the trouble,” said Thomas Weisel Partners L.L.C. telecommunications analyst Ned Zachar.
AWS publicly maintained a strong front in light of the issues, though there were rumblings of possible trouble going back to early last year when the carrier instituted its Project Pinnacle initiative that resulted in the streamlining of its operations and reorganization of its workforce around the company’s Redmond, Wash., and northern New Jersey campuses. Industry sources at the time indicated the move was to prepare for an eventual deal with Cingular, which was looking for alternatives to grow its wireless presence after being rebuffed by Deutsche Telekom AG about the possible sale of T-Mobile USA.
As one of only two independent nationwide carriers (Nextel is the other), AWS was viewed by many as a prime acquisition target.
“It’s obviously much easier to buy an independent company,” Zachar said.
Once word leaked earlier this year that AWS was interested in selling, a number of possible suitors began courting the carrier and AWS was quickly forced to acknowledge it was indeed “evaluating strategic alternatives.”
Analysts noted that once AWS released the statement, the end was near.
“There was blood in the water and the piranhas were circling,” the Yankee Group’s Entner noted. “You can fight off one, but not all of them at once.”
Initial reports indicated that Cingular placed an unsolicited $30 billion bid for AWS that valued the carrier’s stock at around $12 per share, which was a healthy premium over the stock’s then sub-$10 per share trading price. Sensing there were other interested parties, AWS’ management set up an auction that eventually drew out Vodafone Group plc as a serious bidder against Cingular and quickly raised the winning bid to more than $40 billion, or $15 per share, by the middle of February. Compared with the $3.25 trading price AWS stock was valued at in late 2002, or even the sub-$7 prices of late 2003, AWS’ management was looking at a solid return for its investors.
“I think [AWS’ chairman and chief executive officer John] Zeglis realized that $15 per share was a healthy premium on what the company was trading at,” Zachar said. “It was no where near where the company was at when it was first spun off, but was a good premium compared to where it has been trading.”
In addition to some AWS’ investors pocketing a nice return on their investments, the carrier’s management reportedly will be well compensated for its troubles. Published reports indicate Zeglis could pocket more than $15 million from exercising options and as much as $24 million including salary and bonuses once the deal is completed. Other AWS executives, including Michael Keith, president of mobility services, and Andre Dahan, president of mobile multimedia services, could take home more than $7 million according to government filings.
AWS also plans to spread the wealth among its approximately 30,000 employees as industry sources note the carrier plans to spend $30 million this year on bonuses for employees who stay on until the sale to Cingular is complete. And those that survive the eventual integration with Cingular will once again be part of the nation’s largest wireless carrier.
