The success of the personal communications services industry has astounded industry analysts, PCS company executives and cellular carriers alike.
The PCS industry is about two years old and already has penetrated the market, driven down prices and earned high revenues faster than anyone had expected.
“It’s exceeded my expectations of a few years ago,” said Andrew Sukawaty, chief executive officer of Sprint Spectrum L.P., a nationwide PCS licensee. “The amount of financing the industry has pulled in is amazing. The continued growth rates are amazing. It’s a bright and early start for PCS businesses with heavy competition to have healthy cash flows and margins.”
“The PCS industry has absolutely exceeded expectations,” said Richard Siber, director of Andersen Consulting’s worldwide wireless consulting practice. “From buildout to subscriber adoption, the PCS industry has met and exceeded all industry projections for coverage, products and services and price points.”
Though most second-quarter reports haven’t been released, a recent report from Salomon Smith Barney in New York speculates PCS carriers captured 46 percent of net additions and 94.7 percent of sequential revenue growth during the second quarter. The PCS industry’s annualized revenues as of the second quarter total $3.8 billion, up 309 percent from last year.
“We’re predicting more than 50 percent (of net additions) this year,” said Thomas Lee, analyst with Smith Barney. “It’s been the trend since last year.”
Lee said the PCS industry’s strong net gains are attributed to a growing demand by new customers for digital services with added features, no contracts and lower airtime rates, as well as an ongoing migration of existing analog customers to digital networks. The trend favors PCS carriers because of their digital capacity and flexible pricing.
Coverage still king
Cellular carriers still have the upper hand when it comes to coverage and are using that as a marketing tool to distinguish themselves from PCS companies.
“We will get customers that say, `You don’t cover this town. Your service is not an option for me,’ ” said Eric Ensor, president of BellSouth Mobility DCS.
Though the race is on to fill in coverage gaps and build secondary markets, the advent of dual-mode/dual-band phones have eased the pressure somewhat. Code Division Multiple Access and Time Division Multiple Access carriers have been offering dual-mode/dual-band handsets for many months, while Global System for Mobile communications carriers are expected to begin offering these handsets this summer.
“When the dual products were delayed for everyone, it really forced us to fully build out our systems,” said Jim Murrell, vice president of business development with Powertel Inc., a PCS provider in the Southeast. “We’re glad it did. We realize the customer really wants the features GSM brings.”
Many GSM operators are leery about offering dual-band/dual-mode phones extensively because customers won’t get most of the same digital features on their handsets, the reason they were attracted to digital service in the first place. “It’s frustrating to go from digital to AMPS,” said Murrell.
“There are some real issues with customers and how they will use them. There’s an education process in the sale of that, and we’re moving slowly,” said Ensor.
CDMA operator Sprint PCS said it doesn’t push dual-mode/dual-band handsets aggressively, and PrimeCo Personal Communications L.P. says dual-mode/dual-band handsets are an important part of its business, but won’t be pushing a nationwide offer until it receives digital dual-band and tri-mode handsets in the first quarter.
“Buildout for the industry and for PrimeCo is critical. We need to continue to expand our digital footprint. The primary differentiator with our cellular competitors as well as competitive situations against companies like Nextel is the digital features that can be offered in a larger area,” said Russ Wiseman, PrimeCo’s vice president of marketing and strategy.
Buildout progress
The main buildout roadblocks, including tower siting problems and the not-in-my-backyard syndrome, have eased somewhat, say industry analysts, allowing carriers to roll out more quickly than last year. Though the wireless industry still is facing hundreds of moratoria in communities concerned about health and aesthetic issues associated with placing towers in non-industrial areas, carriers are doing a better job of educating communities about the need for wireless service. Carriers also are actively seeking to collocate sites with other operators, hide towers and build towers on government property, said Andersen’s Siber.
“We’re seeing creative approaches and measurable results to getting sites and filling in necessary holes to create a ubiquitous network,” said Siber.
As such, Sprint PCS, having launched service in 134 metro markets last year, is planning another aggressive run of launching markets, starting with Jacksonville, Fla. It plans to offer service in 100 more markets by mid-1999 through its own network and affiliate networks.
“It’s critical to get your fair share of the market,” said Sukawaty. “The earlier you get in the game, the better off you are. Certainly, we will push as hard and as fast as we can.”
Powertel has service in 26 metro markets, recently launching service in Athens, Ga. PrimeCo, which owns 11 MTAs, said it is expanding into secondary markets in a focused way, responding to where customers want service. BellSouth Mobility DCS said it should have about 80 percent of its pops covered by the end of the year.
AT&T Wireless Services Inc. has been notably slow in launching PCS markets, having launched 11 of its 21 MTAs, with no launch announcements this year. AT&T’s buildout plans also include affiliate agreements and other ownership schemes, but none have been announced this year.
In general, PCS carriers are expected to announce more affiliate agreements this year to help them build out markets faster, and the opportunity may be ripe to grab the many C-block licensees that return licenses under the Federal Communications Commission’s restructuring options. Sprint PCS recently announced affiliate agreements with five former C-blockers. It expects to announce many more such deals.
“It’s good business for us and the other party because they get to affiliate with a national brand, and roaming minutes are coming their way,” said Sukawaty. “We benefit because many have unique positions. They’ve built customer bases, and they know the local market. They can do a better job in that area than we can on our own.”
Pricing
While PCS carriers have been successful in quickly driving down the price of wireless service, rationality now has entered the market. Gone are the extremely cheap big bucket-of-minute offerings pushed by the majority of PCS operators last year as ways to load networks and respond to competitors, say industry executives and analysts. Carriers don’t want to undermine the value of wireless service.
“We will not respond to new entrants in the market like we did in 1997,” said PrimeCo’s Wiseman. “We are confident and will not knee-jerk react to the latest competitive entry. We want to be competitive on price, but not at the lowest price point in the industry.”
While the name of the game last year for newly launched PCS operators was to sign a customer at any price for the sake of growth, carriers today are working to drive profitability in an extremely price-sensitive marketplace, said a report from UBS Global Research. That means offering advanced calling features and bundled packages.
But the pressure remains for PCS operators to continually lower prices. Analysts expect pricing to continue to slide down quarter by quarter, and that’s OK, said Perry Walter, telecom analyst with Robinson-Humphrey Co. L.L.C.
“Quarter to quarter, prices are declining, but cash costs per subscriber are falling faster,” he said. “By lowering prices y
ou have elasticity of demand, and you encourage more people to use the phone. The more people may sign up for service that may not have signed up at a higher price … As long as cash costs are declining, operators can make money doing that.”
“The first three years in the industry, we predicted a 25-percent decrease in pricing,” said Sukawaty. “We’re seeing that happen. There continues to be efficiency gains to drive down costs and prices, heavily offset by more usage.”
Robinson-Humphrey’s latest pricing survey indicates wireless prices have decreased 4.6 percent to 8.2 percent since March. PCS operators still have a discount relative to cellular ranging from 1.1 percent to 8 percent, depending on the plan size. In markets in which both A- and B-block operators are in service, the average PCS discount to cellular is 5.5 percent, 8.2 percent and 8.7 percent, respectively for low-end, mid-level and high-end plans.
“Overall, the heavy promotional activity of previous quarters’ surveys continues to decrease, especially with PCS, with smaller and short-term promotions being offered to entice new customers,” said Walter in the report. “We do, however, continue to see large package sizes expand, offering customers greater value.”
Move to consolidation
“The biggest challenge (for the PCS industry) is customers and cash flow,” said Sukawaty. “The trick for new entrants is to find their beach head to develop a low churn customer base that can grow.”
For Sprint PCS, it means growing its national system rapidly, working on adding new services and “constantly being on the innovation side to drive the market,” said Sukawaty.
“We’ve come up with pricing that is hard for local and regional carriers to match. We’re bundling service and doing things that are unique. We’re trying to draw a very broad set of customers,” he said.
It’s not an easy task when as many as seven carriers are vying for customers in every market, which is why consolidation is inevitable in the PCS industry, say analysts. Increased competition already has triggered the start of mass consolidation in the cellular industry, and it’s a matter of time before the PCS industry follows.
“We’ve seen intense price competition, which has eroded margins faster, and we’ve seen many companies spend larger dollars than expected on marketing campaigns because they were outflanked,” said Siber. “AT&T and Sprint have done a tremendous job of branding by creating a national ubiquitous footprint. It creates more pressure on the independents and regionals.”
Sukawaty said the economies of scale in the wireless industry are too enormous for carriers to remain independent.
“If you take a 1-million customer regional operation against a 10-million operator, the cost differences are in the 25-percent range. That’s not sustainable for a local or regional player. It’s inevitable there will be consolidations,” he said.
Industry watchers have not seen many mergers in the PCS industry as of yet because of uncertainty, said Sukawaty. C-block licensees are returning licenses in droves, and the three largest C-block players are in bankruptcy.
“It’s harder to negotiate any merger because you don’t know what the value is day to day. Once we get a clear view of the values and get past the C-block settlement, more deals will come together,” he said.
Analysts speculate the country’s GSM carriers may be the first to consolidate because they are cleaning up their balance sheets faster than other PCS carriers. The GSM Alliance was formed last year to help GSM carriers create one brand and bring down the economies of scale, but it still will be difficult for them to remain independent, say experts.
“GSM operators clearly are poised to have a market influence. The question is how big, where and when,” said Siber.
Speculation also runs high that Bell Atlantic and AirTouch, owners of PrimeCo, will merge. Published reports indicate Bell Atlantic and AirTouch have been trying to create one brand name and leverage a national presence.
