Be on the wave or under it
News Ė 03/20/03
Is Wireless Industry Consolidation on the Horizon?
Our Guest Columnist this issue is Nick Stanley,
telecom expert and principal of Lecoma International, Ltd. Nick
has written for SNS before,
and this issue he takes on the question of consolidation in
the wireless industry.
The recent bankruptcy filing by iPCS, an affiliate of
Sprint PCS, has again raised the question of whether or not
the wireless industry will begin to consolidate. Leaving aside
the issue as to whether or not the limping US economy can support
six nationwide wireless companies seemingly locked into a deflationary
price model (getting more for less money Ė otherwise known as
the race to the bottom), you might take a look at whether a
merger or acquisition makes sense at all.
The only sure beneficiaries
from a consolidation will be the deal-hungry Wall Street investment
banks who will be guaranteeing their millions in fees. The shareholders
are eager to see anything rise in their portfolio, but the record
shows major deals can depress stocks as well as benefit them.
Let's take a look at the reasons
companies merge or buy out rivals and see what, if anything,
makes sense here. Our subjects, you may recall, are Sprint PCS
(part of Sprint itself, a diverse telecom company [FON]), Cingular (jointly owned by SBC [SBC] and
Bell South [BLS]),
ATT Wireless [AWE], T-Mobile (Deutsche Telekom
and Nextel [NXTL].
The textbook says companies
merge or acquire another for economic reasons. In today's market,
pricing power is almost non-existent. Increased margins come
from lowering fixed and variable costs. How would consolidation
help? Or would it?
- Economies of scale Ė lower costs since
fixed costs are spread out over more customers.
Analysis: These are all huge, nationwide companies
to begin with. Their infrastructures are largely built-out,
a fact that is reflected in their massive debt. Towers and
networks in place could be consolidated but there are few
buyers for redundant pieces. Not to mention that no single
network standard exists, so the only pairings that could make
sense are those between carriers with compatible networks.
For example, Sprint and Verizon
both use CDMA (Code Division Multiple Access). AT&T is
transitioning from TDMA (Time Division Multiple Access) to
GSM (Global System for Mobile Communications Ė the standard
for most of the world). Nextel stands alone with its proprietary
Conclusions: very weak positive to definite
- Efficiencies of operations Ė lower variable costs
as the larger operation saves on customer acquisition and
Analysis: Gaining efficiencies can only happen
if the combined customer base can be pooled and managed easily
with a single set of back office systems. We know from the
wireline experience that integrating
back office systems is a nightmare and incurs tremendous costs,
mitigating much of the potential costs savings. Branding and
customer loyalty is weak and if there is any breakdown of
customer service or bungled billing issues, the merged company
can kiss those subscribers goodbye.
Conclusions: very weak to definite negative,
- Lessening of price competition Ė fewer competitors
could mean less price pressure as excess capacity is taken
off the market.
Analysis: Cell phone penetration, while not
at European or Asian levels, has reached a maturity level
and is in saturation in the most desirable segments of affluent
professionals and middle class families. Conceivably, fewer
competitors will decrease churn, if only because there are
fewer companies to churn to. But, telecom itself continues
to show a propensity for cutthroat price competition. The
market supports a price premium for anything new for about
as long as it takes for a competitor to show up, in which
case the price rapidly decreases to cost if not below.
Conclusion: there's no evidence a consolidation
would stabilize prices, much less allow for any significant
In short, it's difficult to
see how a consolidation could be justified on purely operational
There are other barriers to
consolidation. The massive debt carried by all the carriers
as well as their owners has put some debt ratings at or near
the junk level. Adding any more debt, plus the expenses necessary
to undertake a consolidation in the hope of achieving future
gains, could push the combined operation over the edge into
junk territory. That results in a double whammy as not only
their debt is dumped by institutions who
cannot carry junk debt, but their overall debt costs rise as
lenders demand higher interest for the risk.
At some point, either the
Feds or the states will examine with a skeptical eye further
mega-mergers in the telecom industry, arguing that most mergers
appear to be a way for companies to shed workers, diminish consumer
choice and otherwise work against the public interest.
In short, if consolidation
occurs, it may be because the pain of continuing has outweighed
the pain of merging; a poor choice but one that may be inevitable.
The alternative, and one that would likely be a true Ė if painful
-- economic benefit to the industry, is to have one or more
networks simply go dark, the customer base migrates on its own
to the survivors and the infrastructure either scrapped, broken
up or acquired depending upon what and where. A worst case,
but the law of the capitalism jungle is ruthless.
- Shameless Self-Promotion Dept.: I was
quoted extensively on future tech in a recent issue of the
Minneapolis magazine, Upsize, which
is aimed at growing businesses.
On April 16, Iíll be speaking at Minnesota Information Professionals
8th Annual Educational Seminar, which examines
business security. My topic will be Organizational Security
Ė When People Are Involved. You can get more details at www.MnIPS.org.
A couple issues ago I debuted SNS Begware,
an opportunity for you, gentle reader, to express your appreciation
by tipping your server via PayPal.
See the sidebar for more info. Total in the kitty so far:
$38.48. (Thanks, Roger and Ken!)
Iíve reworked the TrendSpot and Opinion
sections, adding a Prediction
Tracking page to track the various predictions Iíve made,
and also added a Stuff I Said page with some quotes of things I said a
decade or so ago on the Net.
I repurposed and adapted an article about the wireless service
known as Short Messaging Service (SMS) for the Reside newsletter.
Itís entitled, Wherever they go, there you are
and it points out how marketers can use Ė carefully Ė this
new way to contact their customers.
Iím featured in Manyworldsí Thought Leader Showcase, which lists a few of the white
papers Iíve done. Iíve also added their fancy icon to the
Finally, the CTOMentor wireless
white paper, You Can Take It with You: Business Applications
of Personal Wireless Devices, is available at ITPapers.
- The Traveling Wi-Fi: I spent
last week in Florida and helped my Dad get
broadband. This was not easy since heís too far from the Vero Beach central phone office
for DSL and the local cable company doesnít offer cable broadband.
Turns out, thereís a company there that is using Motorolaís
Canopy system to do fixed
Fixed wireless means the provider mounts a small antenna outside,
somewhere where it can have a clear line of sight to the providerís
antenna. In our case, we could actually see their 200 foot
antenna about a half a mile away. The antennae communicate
at 5Mbps, and that should result in 2Mbps download and 1Mbps
upload for my Dad. Since he lives in a condo, the association
only wants one antenna per building, so at some point, others
will be sharing the bandwidth.
I set him up with a Dlink Wi-Fi router and two
laptop cards so he and my Mom can access the broadband connection
anywhere in the condo.
On my way back home, I determined that Orlando, Dulles and
OíHare airports all lack Wi-Fi services, despite Dulles sporting
two Starbucks on the same concourse. I wrote before about connecting to the OíHare baggage handling
WLAN, but that doesnít have Internet access, so itís only
of interest to terrorists who may want to reroute bags.
- Cisco Acquires Linksys: Networking
heavyweight Cisco is acquiring home networking market leader
Linksys Group in a $500 million stock deal. Linksys currently markets 70 devices, which are sold
to consumers at retail stores and online, and had sales of
$429 million last year, a 24 percent growth rate over 2001.
Whatís it all mean? Well, perhaps Cisco will improve the quality
of Linksysís equipment. Iíve had
two dead Linksys routers, and a
bad 802.11g card. However, since Cisco sells virtually nothing
at retail to consumers, this could be an interesting challenge
for the industry juggernaut.
Boston Daily News
- IBM to Unwire Truckers and Other Cheeseburger
Lovers: Big Blue has inked an agreement with Columbia Advanced
Wireless (CAW) and Rocksteady Networks
to set up Wi-Fi (802.11b) hotspots at more than 1,000 truck
stops across the US. The market may not
be huge, but CAW claims that as of 2000, more than 25 percent
of the nation's 3.3 million truck drivers carry laptops. IBM
recently created a joint venture with Intel and AT&T Wireless
called Cometa and announced a test
implementation of Wi-Fi hotspots in 10 McDonald's restaurants
in Manhattan. Cometa
and the fast food retailer plan to take it nationwide later
this year. Not everyone thinks this is a smart idea. How long would
you want to site in one of those Mickey D torture devices
they call chairs?
Return to Mikeís
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Canít Get Enough of ME?
In the unlikely event
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Also check out the TrendSpot for ranking of
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14, 1928 - July 5, 2003
Jane C. Ellsworth
20, 1928 - July 20, 2003