By Josh Long
THE NO. 1 WIRELESS RESELLER is
calling it quits. WorldCom Inc. disclosed in June it would exit the wireless
resale business, referring its 2 million customers to underlying carriers the
company had used. Even prior to filing for Chapter 11 protection in July, the
carrier was trying to shed the wireless unit, claiming it was an unprofitable
division despite generating approximately $1 billion in annual revenue. WorldCom
executives say the company will save approximately $700 million a year by
unloading the business.
By Aug. 1, WorldCom and four of its
underlying carriers OK’d referral agreements, which allow them to market their
services directly to WorldCom’s former customers. Those wireless carriers
include AT&T Wireless, Verizon Wireless, ALLTEL, and an unnamed provider.
WorldCom also reached an agreement with Cingular Wireless, subject to bankruptcy
court approval as of press time. WorldCom wireless customers will have to choose
a new service provider.
WorldCom resold wireless services
for about five years, but never acquired its own network though it made several
attempts. In 1999 it considered acquiring Nextel Communications, a Reston,
Va.-based wireless carrier focused on the corporate market. In 2000 the proposed
mega-merger of WorldCom and Sprint Corp. fell apart, thrashing WorldCom’s hopes
of acquiring Sprint PCS.
A WorldCom spokesman declined to
comment on why the wireless unit bled losses. The wireless unit was doomed to
fail because WorldCom was paying distributors exorbitant commissions that
ballooned the cost of acquisition for each customer, says Paris Holt, CEO of
Unified Signal, a company that has developed a platform enabling retailers to
become virtual network operators."Their payback must have been 18 to 24
months," said Holt, a veteran in the wireless industry. "Their cost of
acquisition would never allow them to be a profitable reseller."
The wireless resale model is a
low-margin business and simply does not allow a company the size of WorldCom to
compete directly with the likes of AT&T Wireless and Verizon Wireless,
explains an expert familiar with WorldCom who agreed to speak on background.
"I don’t think resale affords
the opportunity to try to compete head-to-head with facilities-based
carriers," he says. "WorldCom knew that ultimately they had to acquire
a network but it just never happened."
Even though WorldCom lost money in
the wireless business that does not mean the model is a bust: It can work if a
company operates a "smaller" and "modest" operation,
pinching pennies and serving niche markets where national carriers are reluctant
to compete, he says. "There are resellers out there that are making money
where the model does work."
The demise of WorldCom Wireless is
good news for the country’s largest wireless carriers. Having suffered a slide
in new subscribers following a few years of frenzied growth, national carriers
have access to hundreds of thousands of potential customers.