Picture this. Down at the Kennedy Space Center at Cape Canaveral, Fla., the space shuttle Columbia sits on the launch pad. The astronauts have run tests for months in preparation for the big day. Now they are strapped into their seats in the command module, and the countdown begins. Three, two, one … blast off. Vroooommm. The boosters fire up and massive plumes of smoke billow from the base of the shuttle. After three minutes of this pyrotechnic show, the engines stop. The shuttle is still sitting there. The crew emerges ecstatic, high-fiving and whooping it up. The assembled press corps exchanges puzzled looks and asks the commander, “What’s the big deal? You didn’t go anywhere.” The commander indignantly responds, “Are you kidding, that was a picture perfect soft launch.”
During the last month or so, the wireless world has been a whirl with launchings of new digital systems. PrimeCo, Omnipoint, InterCel, Western Wireless, BellSouth, AT&T and Rogers Cantel all have initiated digital services of various flavors and radio frequencies. Earlier in the year, AirTouch and Bell Atlantic “launched” 800 MHz upgrades using Code Division Multiple Access technology. These are heady times, especially for the new PCS companies.
Omnipoint takes the cake for the biggest fanfare around its launch. A massive ball at New York City’s Tavern-on-the-Green capped the big day.
At the other end of the spectrum, so to speak, was PrimeCo. They held an RBOC-esque conference call with analysts and investors that lasted about an hour. AT&T launched its digital cellular service with a big press conference in New York. In order to muck up the waters, AT&T called its cellular upgrade “PCS.” Most of the other launches quietly released a fax to the financial community and started selling the phones in their respective local markets.
Despite these different methods for announcing the launch of digital service, the actual impact in the marketplace is not closely correlated with the amount of fire and brimstone attending the announcements.
For example, Omnipoint has not yet run its ads on television in the New York market. Their stores are open, but it seems the big push is still in the future. AT&T Wireless is not promoting its digital service as yet. We see no ads for digital in the New York papers.
In contrast, PrimeCo stores are open and ads are being run in their markets. So even though the PrimeCo launch was the lowest key announcement, it seems that they are being the most direct about drumming up customers.
When it comes time for a wireless company to start up its digital service, the question of a launch strategy is one of the toughest to reconcile. There are a lot of forces that push the operator to start up quickly. At this time of year in particular, there is a desire to try to be on the air before the big Christmas selling season. The cellular industry has historically garnered 40 percent of it annual subscriber additions in the fourth quarter, and it would be nice to grab some of those.
There also is pressure among the A- and B-block PCS players to be the “first to market.” Large doses of machismo and tech-tosterone surround being first. It gives bragging rights that no one else can claim. These are often rationalized as giving a massive headstart from a business perspective, but we have our doubts. Orange started service fourth in the United Kingdom, but is now in third, so being the first PCS entrant is not a sure fire thing. We do not really see a big timing advantage between the various A- and B-block players, and even some of the C blockers. We think in five years, when we look back, it will be perceived that the PCS companies all started at about the same time, and other, more basic operational factors will determine how they are doing, not so much their launch dates.
Further gravitational forces toward a launch come from promises made by management to the financial community. Billions of dollars have been raised for zero revenue enterprises, with the forward plan being the “thing” that investors bought into. Self-set dates that are missed could be dealt with harshly by unforgiving markets. They will be viewed as signs that management cannot deliver on its promises.
The factors against a quick launch include a coverage plot that has a lot of holes in it. Customer complaints are not what you want right out of the box, especially if the positioning is as a premium service. All it takes is a few reporters to get a hold of a handset, and find the signal coverage is less than advertised, for a company to have a PR debacle on their hands. If the signal strength is weak, then claims of “crystal-clarity” could be debased. Holding off a bit on launch can allow more cell sites to be constructed, perhaps alleviating these problems. A back office that is not ready for the deluge of business that an aggressive launch brings can cause difficulties. APC in Washington, while off to a spectacular launch in terms of subs, had a mess in their billing system that is only now being cleared up. And of course, if not enough handsets to fill demand can be obtained, then disgruntled potential subs could be created.
Torn between an aggressive “hard” launch and a quieter “soft” launch, carriers are trying to balance the conflicting demands, and do it “just right.” The way this is being done is by making a big deal about “launches,” but then treading carefully on the follow through. So beware of the hype around the launches, and focus on the actual results.
A key lesson should be drawn that the actual launch date does not have a big impact on value. Discounted cash flow models are just not that sensitive to this quarter’s net adds. We like a term used by Glenn Marschel of PageNet, called “time to mass.” This is when a certain penetration level is reached, say 1 percent or 2 percent (you pick it). This is really the key number to judge these companies on, rather than the date of the launch announcement, because the definition of “launch” varies so widely among the carriers as to be useless to investors.
This article is reprinted with permission from Bensche-marks, a CS First Boston Corp. newsletter. The author can be reached via e-mail: jbensche@csfbg.csfb.com.
