NEW YORK-As mergers among telecommunications giants tear around the track at breathtaking speed, it may seem that domestic deregulation, intended to promote competition, has instead achieved consolidation.
However, a glance in the rear-view mirror reveals a bevy of new competitive wireline local and interexchange carriers gaining ground, moving into position to provide diverse synergies with wireless: as resellers, acquirers, joint-venture partners and backhaul providers, among other roles.
“In my opinion, people who say deregulation didn’t help are posturing,” said Sanjay Jindal, communications industry specialist for Houlihan, Lokey, Howard & Zukin, Los Angeles.
“I see a role for CLECs in wireless. It’s an ideal sort of marriage, and strategically it makes a lot of sense.”
Partly due to federal legislation, partly due to rapid technology advances in switches, data transmission and other key infrastructure technologies, the telecommunications landscape is undergoing a dramatic transformation.
“With digital and prepaid, everyone (someday) will have a wireless phone and minutes of use will fly onto wireless,” said Jeffrey L. Hines, telecommunications analyst for BT Alex. Brown Inc., New York.
“What AT&T (Corp.) and other wireless companies don’t have is local wireline telephony, so they use other companies for backhaul. CLECs are building networks (that wireless carriers can use for backhaul), but CLECs don’t have the access to local customers that wireless carriers have.”
No one can be certain how the telecommunications environment will look when it reaches its next state of equilibrium, but industry analysts offered various scenarios, none of them mutually exclusive.
The acquisition play
“Customers want a one-stop-shop relationship with a single provider for local, long-distance, (mobile) wireless, voice and data. My personal belief is that, for customer service, you will need to be a facilities-based carrier,” said Martin Dunsby, senior manager of telecommunications practice for Deloitte & Touche Consulting Group, Atlanta.
“It is harder for wireless carriers to become facilities-based [competitive local exchange carriers] than the other way around. It is more rapid to deploy and cheaper to acquire wireless.”
Dunsby cited Level 3 Communications Co. and Colorado-based Qwest as potential “dark horse” wireless-buyer candidates.
New Jersey-based RCN is among “the smaller, regionally based carriers, any one of which could make a regional wireless acquisition,” he said.
“Depending on whether you have the extra capital, you might want to buy an existing carrier or take risks on the C-block licenses.”
Money, of course and as always, is a big factor, but it may be less so in today’s environment, he added.
“How could WorldCom afford MCI? We’re in a funny money situation in the telco market, and the normal rules of what’s affordable don’t apply.”
WorldCom Inc. is another player to watch in the wireless acquisitions arena, according to Robert Konefal, managing director, and Dennis Saputo, senior vice president, of Moody’s Investors Service corporate finance group, New York.
“Moody’s expects WorldCom will continue to make acquisitions to enhance its franchises, including the possible entry into wireless services and further expansion internationally,” they said.
That said, however, it also is important to stress that opinions about these wireless acquisition possibilities are by no means unanimous.
“The prevailing view is that, to be successful, companies must offer a full suite of telecom services, a growing list, depending on the customer. I wouldn’t say that (view) is completely right,” said Toby Dingemans, senior associate of Broadview, Fort Lee, N.J.
“It’s not a trivial undertaking to offer wireless. Because of the failure of some of the C-block players, I don’t see CLECs going after wireless companies.”
Competitive wireline carriers have focused their efforts on urban areas, and this strategy complicates their options for wireless acquisitions within their service areas.
“Trying to find a cellular property to buy that matches your territory would be difficult. Buying a piece of a (wireless) carrier would be a possibility but not a cheap one,” Dingemans said.
“Some of the smaller, new [personal communications services] entrants are possible targets, but their debt covenants are fairly strict about changes in control, so they would have to refinance their debt as part of the sale.”
The resale option
“The concept of on-net (as opposed to) off-net, is key to the concept of CLECs in wireless. If I’m a carrier and can take a call from end to end, I capture all the revenues. (For whatever) goes off-net, I lose some of the revenues,” said Michael R. Hannon, general partner of Chase Capital Partners, New York.
As a service-bundling approach to customer retention, CLECs may consider emulating a service like AT&T’s wireless-office offering, which provides zoned billing for low-mobility and high-mobility wireless telecommunications.
A CLEC offering this service “may have to share some of the (off-campus) minutes with a wireless carrier, but it makes more sense to rent than to buy spectrum,” Hannon said.
For individual, personal consumers, that type of service arrangement may prove more lucrative for companies like RCN and WorldCom than does providing residential last-mile service, he added.
Reselling is a narrow-margin business that a CLEC might consider “if it finds its competitors are eating its lunch by offering fixed and mobile wireless,” said Broadview’s Dingemans.
“In favor of reselling is the fact that networks aren’t at capacity, and that will become more (the case) as newer entrants complete their networks.”
Should reselling wireless prove important for a CLEC, Dingemans said the competitive wireline carrier might use it as an interim measure before becoming a facilities-based wireless provider.
From the ground up
“Craig McCaw is a visionary in wireless,” said Jindal of Houilihan, Lokey.
Jindal and Hines of BT Alex. Brown, said the McCaw properties, all relative newcomers to the scene, are being assembled systematically into a multiservice carrier.
Nextel Communications Inc., McCaw’s enhanced specialized mobile service carrier, “is putting traffic onto NextLink (Communications Inc.),” Hines said.
Nextel and NextLink, a start-up CLEC, each own 50 percent of NextBand, a Local Multipoint Distribution System license holder, Hines said.
“In July, Nextlink announced two major initiatives … Its CLEC business will be expanded to compete for 27 million addressable business lines in the top 30 U.S. markets, and the company will share in a $700 million investment with Nextel and Eagle River Investments L.L.C. for a portion of the nationwide fiber-optic network being built by Level 3,” said Timothy E. Caffrey, director of corporate ratings for Standard & Poor’s Corp., New York.
LMDS as mobile-fixed link
“We need to redefine wireless. The bridge is LMDS, and it is what CLECs should do on the data platform,” said Hannon of Chase Capital Partners.
“We’ve been investing in LMDS-Formus Communications, WNP. We think it’s an interesting play from a wireless perspective for high-speed data. If I put one radio transmitter in a town, I can go out one to three miles and give all the benefits of a CLEC without putting fiber down.”
LMDS “becomes significant” because it solves a CLEC problem left unresolved by “the advancements in wave division multiplexing in fiber optics, allowing more bits per second,” said Pete Peterson, wireless communications analyst for Volpe, Brown, Whelan & Co., San Francisco.
“This doesn’t lower your cost because it doesn’t add (connectivity to additional) buildings, so I think there will be a significant requirement for wireless access to these fiber networks to increase return on assets with wireless
extensions.”
Both LMDS and point-to-point microwave will play important roles in achieving this goal, he said.
A new industry model
“Why don’t paging and cellular companies merge their applications together? Because the mindset is that the network is the application,” said Michael Elling, managing director of Prudential Securities Inc., New York.
“I have argued for a reorientation of the industry from vertically integrated, all-things-to-all-people carriers to horizontally differentiated intranets akin to the [Operating Systems Interconnect] stack of the computer world. This framework already exists in the long-distance, or wide area network … (and) is also somewhat developed in the customer premise, or local area network.”
While responding to customer preference for dealing with a single telecommunications services provider, companies providing these end-to-end solutions will begin to focus “on being a single layer within the OSI stack,” Elling said.
“We have been in a 10-year cycle of convergence, but we are beginning to see signs of divergence, in which companies are divesting themselves of non-core businesses.”
Peterson of Volpe, Brown, said he sees the same sea change. However, in his view, “the model I’d build is data taking on a telco look.
“That’s why Nortel bought Bay Networks and Lucent (Technologies Inc.) is rumored to be buying Ascend. There will be a convergence of voice and data encoded on the network.”
