WNP Worsens Wireless War

Posted: 11/2003

WNP Worsens Wireless War

By Josh Long

The U.S. wireless industry, where
six phone giants spar each quarter to protect their turf and acquire new
customers, is poised to get even more cutthroat.

Nov. 24 is the day Verizon Wireless, the No. 1 U.S. mobile
carrier, and its rivals must start allowing customers to keep their phone number
if they defect to another provider. This federally-mandated requirement is going
to trigger a ferocious marketing war aimed at stemming attrition and adding
customers in an industry Wall Street claims is destined for consolidation.

The primary effect from [wireless number portability (WNP)
] is likely to be felt in 2004 with the increased competitive pressures
manifesting themselves in rather predictable ways: higher costs, lower prices,
more churn and higher growth in subscribers, say analysts with Goldman Sachs in a July research report.

Following the introduction of WNP, churn may be high in the
small business and enterprise markets, says research firm In-Stat/MDR. AT&T Wireless, the third largest wireless carrier, faces a
relatively high risk of losing business customers in the next year, according to
a report In- Stat/MDR released in September. By contrast, Verizon Wireless faces
a relatively low risk that its business customers will defect, according to the
research firm.

However, the future isnt written in stone, says
In/Stat MDR chief market strategist Kneko Burney in a statement. These data give providers a worst-case scenario and they
should consider it a call to action to improve loyalty programs for both
individual and corporate decision-makers.

The quagmire facing wireless carriers is that they will find
it hard to predict who is likely to churn despite all the data they keep on
their customers, says David Meredith, vice president for communications, media
and entertainment with AMS, a consulting and integration firm.

WNP will so radically change the behavior of the customer
base a lot of those models are going to get turned on their heads, Meredith
says. He says wireless carriers must read results quickly and be flexible enough
to abruptly change their marketing strategies and the ways they interact with
their customers.

Some analysts predict about half of all wireless customers
will defect next year. We dont think its all going to hit immediately,
says Meredith.

So who will prevail in this war of attrition? That depends who
you ask.

The Yankee Group, a research and consulting firm, says Verizon
Wireless and T-Mobile USA Inc. will prevail as the winners. Winners will be companies with a
higher percentage of customers on contract, a stronger brand identity and those companies that are
better differentiated on value or quality, according to the research firm.

Tom Hart, a wireless analyst with consulting and research
giant Gartner Inc., agrees that Verizon Wireless and T-Mobile will prevail, but
he also says AT&T Wireless and Nextel Communications Inc. will benefit as well. Hart cites AT&Ts coverage area
and quality network, Nextels push-to-talk service, and T-Mobiles

The predicted losers: Cingular Wireless and Sprint PCS. Hart
cites Sprints coverage quality and holes in the network. Explaining his reasons for his
dour prediction on Cingular, the secondlargest wireless carrier, the analyst
cites its coverage, quality and lack of compelling data services.

The … two [Cingular Wireless and Sprint PCS] have had the
hardest time gaining subscribers over the past couple of quarters, Hart says.
WNP does not help that situation. [It] makes it more acute.

Goldman Sachs analysts disagree. They say Cingular, the joint
venture between BellSouth Corp. and SBC Communications Inc., is among three wireless carriers
best positioned to exploit the new requirement. The analysts also name Verizon
Wireless and AT&T Wireless. These are companies with staying power, a
broad reach in the market, scale and probably an ability to fix whatever
vulnerabilities they possess today, according to the Goldman research report.

However, WNP is likely to have a negative impact on the
broader wireless industry, say Goldman Sachs analysts, who predict an overall
decline in earnings and free cash flow. The reason: Eager to stem churn and steal customers from rivals, carriers
are likely to get even more competitive on price. Many different scenarios
can develop, say the analysts, but we think the most likely is one that
increases the number of churning customers among the six national operators by
about 15 million from 2003 to 2004 and can lead to a $1.5 billion decline in
EBITDA (earnings before interest, taxes, depreciation and amortization).

In the long term, WNP may help create a greater disparity
between the weak and the strong, creating greater incentives for consolidation,
according to the analysts. If this process is sustained over time [the wider
rift between the weak and the strong], logic suggests that the weaker players
will either fail or be more motivated than they are today to seek deals.

Estimated Effect of Wireless Number Portability 2004
(Shifts in share of adds, revenue and EBITDA, by carrier)

Net adds Gross adds Revenue EBITDA
AT&T Wireless 3.7% 16.1% 15.9% 16.5% 15.2%
Cingular 3.6% 16.1% 16.0% 15.0% 15.7%
Nextel 2.7% 7.7% 6.6% 10.1% 16.1%
Sprint PCS 3.8% 11.7% 11.5% 12.0% 12.4%
T-Mobile 3.8% 11.8% 9.6% 7.7% 5.9%
Verizon Wireless 2.7% 33.3% 20.9% 23.5% 36.0%
80.6% 84.9% 101.3%

Source: Company reports and Goldman Sachs Research estimates.

AT&T Wireless
BellSouth Corp.
Cingular Wireless
Gartner Inc.
Goldman Sachs
SBC Communications Inc.
Nextel Communications Inc.
Sprint PCS
The Yankee Group
T-Mobile USA Inc.
Verizon Wireless

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