Wireless resellers say they aren’t sure what will happen when personal communications services enter the marketplace next year, but if PCS launches a price war with cellular operators, everyone’s margins will be squeezed.
“It’s hard to say what the [cellular] carriers will do, but right now everybody is scrambling,” said David Jones, chairman of Progressive Concepts Inc., a telecommunications reseller in Fort Worth, Texas, which also distributes cellular products.
When cellular was an emerging business 10 years ago, carriers relied on resellers and agents to acquire subscribers and load the system. But the market has changed in the last five years, casting a new light on the role of resellers and agents, and raising questions about the use of these parties in launching PCS.
When PCS operators launch their systems in the next few years, they will need to quickly load revenue-generating subscribers. Reselling is an effective way to do that, analysts say.
Cellular operators have been required to sell airtime in bulk at wholesale rates to all parties if they sell it in bulk to any one customer. But there are no federal rules requiring PCS operators to sell bulk capacity at wholesale prices under any circumstances, according to the Federal Communications Commission.
Resellers purchase millions of minutes of airtime at a bulk price from cellular operators each month. Resellers pay upfront for the time; carriers make money from the sale. Resellers generally are responsible for their own debt; they claim profit margins of 20 percent to 30 percent.
Resellers market the service-usually cutting the carrier’s price a bit-and sign up customers. Resellers either give away the phone or sell it, depending on the individual company’s tolerance for acquisition cost.
The reseller gives the customer’s phone identification codes to the carrier and the carrier activates service. The carrier doesn’t have contact with the customer, thus customer information is the property of the reseller. That makes resellers a valuable distribution tool for PCS, said Calvin Wade, vice president of sales for Phase 2 TeleSystems Inc. in Scottsdale, Ariz., a reseller of cellular and paging service.
“They would be smart to aggressively go after resellers, and they will cost less than agents because there are no commissions. But they [PCS operators] won’t own the customers,” Wade said.
Since it takes operators a long time to build marketing organizations, PCS spells opportunity for entrepreneurial resellers, said Progressive’s Jones. And while that may mean competition in resale, not every organization will be successful.
“For resellers, the cost of operating is immediate. You have to work with your own dollars and build up customer by customer. It took us three to four years to get into a positive cash flow,” Jones said. Progressive began with aftermarket car stereo sales, then added cellular, paging, long distance and security systems. They built retail outlets and hired installers, programmers and technicians.
“We were already in the retail end of the business. Cellular has a thin margin, but if you have additional products with large margins, you work the margins back and forth between the products, and you can be very competitive,” Jones said.
Cellular carriers operate on larger margins than resellers and can withstand the cost of giving away phones much easier, Wade said. To keep subscriber acquisition costs low, Phase 2 asks customers to buy a phone or pager, then offers low rate plans.
“If you can keep the cost of a cellular subscriber under $200, you should break even in 14 months,” Wade said.
Carriers express an interest in keeping their reselling ties.
“There’s a strong likelihood that we [U S West Cellular] will continue to participate with resellers because they can reach a niche we may not be targeting at this time,” said U S West spokeswoman Wendy Carver-Herbert.
A long-time cellular agent said reselling may be doing well, but the agent business isn’t doing great.
“Agents are like dinosaurs now to the carriers, who are concentrating on the mass merchandiser and their own retail outlets,” said Richard Hansen of the Cellular Agents Trade Association in California.
“The carriers are getting rid of agents. PCS can be expected to do whatever they can to build up their subscriber base because they have no distribution channel. But if their systems aren’t up for two years, there’s not going to be any agents around in business by then,” Hansen said.
The popularity of portable phones has affected the role of cellular agents, who once were needed to install car phones, Hansen said. Agents generally have contracts with cellular carriers and receive commissions.
One new focus of cellular operators has been the consumer market, approached in most cases through mass merchandisers.
AirTouch Communications Inc. said its distribution mix changes over time, depending on trends.
PCS can be expected to aggressively pursue many distribution avenues, said Jonathan Foxman with BIA Consulting. “New PCS licensees have tons of capacity and, like an airplane, they have to fill the seats. If they don’t sell to resellers, they’ll get nothing for it. If they do, they’ll get something. This is a capacity business,” he said.
