The News – 03/20/03

In this Issue:	Recommended Reading
Is Wireless Industry Consolidation on the Horizon? Shameless Self-Promotion Dept. The Traveling Wi-Fi Cisco Acquires Linksys IBM to Unwire Truckers and Other Cheeseburger Lovers	I realize this is the only newsletter you’ll ever need, but if you want more in-depth detail, check out: Stan Hustad’s The Coaching Connection Insights to ActionTM Management Signature's The Express Read

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 – 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 [DT]) 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 – 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 – the standard for most of the world). Nextel stands alone with its proprietary network.
  
  Conclusions: very weak positive to definite negative.

• Efficiencies of operations – lower variable costs as the larger operation saves on customer acquisition and support costs.
  
  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, again.

• Lessening of price competition – 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 price increase.

In short, it's difficult to see how a consolidation could be justified on purely operational grounds.

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 – 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.

Briefly Noted

• 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, I’ll be speaking at Minnesota Information Professionals 8^th Annual Educational Seminar, which examines business security. My topic will be Organizational Security – 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!)
  
  I’ve reworked the TrendSpot and Opinion sections, adding a Prediction Tracking page to track the various predictions I’ve 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. It’s entitled, Wherever they go, there you are and it points out how marketers can use – carefully – this new way to contact their customers.
  
  I’m featured in Manyworlds’ Thought Leader Showcase, which lists a few of the white papers I’ve done. I’ve also added their fancy icon to the StratVantage site.
  
  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 he’s too far from the Vero Beach central phone office for DSL and the local cable company doesn’t offer cable broadband. Turns out, there’s a company there that is using Motorola’s Canopy system to do fixed wireless.
  
  Fixed wireless means the provider mounts a small antenna outside, somewhere where it can have a clear line of sight to the provider’s 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 O’Hare airports all lack Wi-Fi services, despite Dulles sporting two Starbucks on the same concourse. I wrote before about connecting to the O’Hare baggage handling WLAN, but that doesn’t have Internet access, so it’s 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. What’s it all mean? Well, perhaps Cisco will improve the quality of Linksys’s equipment. I’ve 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?
  802.11 Planet