NEW YORK-“The challenge for the paging industry is to reinvent itself so it can become a free cash-flow business, to put the brakes on capital expenditures and drive up revenues while unit growth is declining,” said Brian G. Coleman, a director of Toronto Dominion Securities USA Inc., New York.
The stampede that started in the mid-1990s to paging resellers as a means to boost customer numbers has led to unrealistic inflation in growth expectations. This resulted in an expensive network expansion boom that couldn’t be paid for out of new customer additions because of high churn rates and low average revenue per subscriber associated with these distribution channels, according to Cynthia M. Motz, vice president of Credit Suisse First Boston, New York.
During the past year or so, “the power has shifted back to the carriers, which don’t have to put up with price undercutting from the resellers,” said Jeanine Oburchay, associate director of Bear, Stearns & Co. Inc., New York.
Better control of reseller channels, the shift away from leased pagers and other efforts to improve operations have started to pay off for paging carriers.
“It’s evident from the upgrades in ratings over the past several months that (securities) analysts are getting more comfortable,” Oburchay said.
That sanguine view isn’t shared by Jane Snorek, research director and portfolio manager for Oberweis Asset Management, Aurora, Ill.
“Growth investors want earnings per share and value investors want cash flow, so people in paging stocks would have to be value investors,” she said.
“Paging companies have never gotten over their enormous debt load, even [Paging Network Inc.], the very biggest (carrier) with the most subscribers. We have definitely exited the paging industry.”
However, Coleman said he believes the advent and expansion of enhanced messaging services promises to be one of the most significant revenue growth drivers for the industry.
“The PageWriter is like a mobile e-mail whose utility can’t be duplicated by a cellular or [personal communications services] phone, and it doesn’t require me, as a consumer, to learn anything new,” he said. “There is a ton of life in it. The functionality is exponentially higher than one-way.”
Analysts are mixed about whether the pending introduction of calling party pays in the wireless industry will impact the paging business. The paging industry estimates that about 30 percent to 40 percent of cellular customers also are paging subscribers.
Calling party pays will negatively affect at least some part of the paging industry, Coleman said. “Upscale” advanced messaging services aren’t likely to be negatively impacted by calling party pays because this group of users isn’t likely to use paging as a call screening device, Coleman said.
Oburchay disagrees. “There is no indication that calling party pays will hurt paging.” The European model, in which calling party pays is ubiquitous and paging less popular, doesn’t provide a valid template for the United States. Paging never had much of a presence to begin with in Europe, where there is a single digital standard, she said.
Even plain vanilla paging, which has been around for decades, provides an identifiable and indisputable service for which there remains demand, according to CS First Boston.
“Paging does work, and there are significant differences between the traditional paging product and other wireless services … If you really need to get in touch with someone immediately, statistics indicate that with a pager, that person can be located almost immediately about 90 percent of the time,” Motz wrote in a recent report, “Where’s the Beep?”
However, CS First Boston also sees paging evolving to become more akin to a provider of wireless data, a service that is complementary rather than competitive with other wireless telecommunications.
“The lion’s share of net additions are alphanumeric, and the existing bases are largely one-way cheap beeps,” Coleman said.
There were about 46 million paging subscribers overall at the end of last year, up by nearly 5 million from 1996, according to CS First Boston. Paging revenues totaled nearly $3.75 billion, and are expected to peak at $4.8 billion by 2001, according to the investment bank’s projections.
From 2005 on, CS First Boston estimates paging revenues will stay in the $4 billion annual range on a subscriber base that has stabilized at about 60 million.
“With the exception of certain specific areas such as alphanumeric, two-way or other enhanced messaging products that may evolve in the future, we believe overall subscriber growth will remain relatively flat,” Motz said.
Snorek concurred with this view, saying that, except for incremental increases in overall subscribers, paging carriers are most likely to “cannibalize” each other’s customers, rather than tapping other kinds of wireless subscribers. She called paging “a dying industry in the United States,” and described it as a method of communications that likely will be supplanted by personal communications services.
“While there will be some improvement in operating cash flow and significant increases in free cash flow as growth in these companies slows down, the absolute level of free cash flow generated will be relatively small compared with the debt levels that have been amassed, dampening valuation prospects for awhile,” Motz said.
