Convinced that wireless growth was significantly outpacing its own estimates, Lehman Brothers Inc. last week dramatically upped its long-term forecast for the wireless industry and upgraded a number of wireless stocks.
“I think of the analogy of an earthquake where pressure builds up on either side of the fault line,” John Bensche, U.S. wireless services analyst with Lehman, said in a conference call Tuesday. “The earthquake happened this morning.”
Bensche predicts tremendous growth in the U.S. wireless industry, with total subscriber additions likely to reach 18 million by the end of the year. But the story gets better long term. The firm believes wireless services penetration will reach 70 percent by 2007, 20 percent more than what Lehman previously forecasted. Bensche now believes wireless penetration will cross the 50-percent mark by 2002.
“Our point of view is that cell phones are going to be huge, huge, huge in the U.S.,” said Bensche. “Large amounts of traffic will go through wireless.”
The surprising elasticity of demand led Lehman to raise its long-term target on average revenue per user from $40 to $45 for the voice business alone. Believing demand for wireless would begin to slow, analysts and wireless executives historically have predicted ARPUs to fall in years to come.
“There has been enormous price elasticity in wireless that has led to rising ARPUs,” said Blake Bath, telecom services analyst with Lehman. “This is a major change in terms of expectations. Our models have straight lined declining ARPUs if not significantly sharper declines in the 1999 to 2002 time frame.”
Lehman analysts cited several reasons for their increased assumptions. Competition has stimulated mass amounts of advertising and lower prices of airtime, in particular big-bucket minute plans. Prices also have stabilized, benefiting a five-to-six-player market in which operators will begin competing on features, coverage and customer care, said the firm.
Near-term historical performance already has outpaced Lehman’s and Wall Street’s estimates primarily during the last three quarters, and second-quarter ARPUs increased across the board among the major U.S. carriers, said Bensche. Improving customer equipment and network quality along with a regulatory environment that is warming up to the industry should also sustain active growth.
One strong indication that penetration will increase significantly in the United States is the vigorous subscriber growth in Europe. The deepest penetrated markets in the world, like Finland with a 62-percent penetration rate, also are the ones adding the most customers, noted the firm.
“Scandinavian operators are beginning to see rising ARPUs as cellular operators are etching on the landline market,” said Jo Oliver, Lehman’s European wireless services analyst. “Sonera’s ARPU increased by 10 percent over the last six months. There is going to be a big uplift from data.”
Lehman said low-speed data applications, particularly short message service, should provide some revenue support in the United States. Finland’s Sonera reports 7 percent of its wireless revenue coming from SMS.
Lehman analysts also said they are bullish on the prospects for wireless data and wireless access to the Internet.
“The growth of data and the Internet have continued to surprise us,” said Bath. “It’s hard to believe no one had heard of the Internet five years ago. Once we see wireless and the Internet come together in the next two years, we’ll see the same explosiveness we’ve seen in the wireline space. We’ll get into a situation where we’re continually revising our estimates higher.”
