In a case of less equaling more, Sprint PCS’ recent announcement that it was reducing the roaming rates between the carrier and its affiliates is expected to have little effect on the smaller carriers that have come to depend heavily on the rates they charge Sprint PCS customers to use their networks. Instead, most analysts feel the move will provide stability to the smaller carriers by solidifying their roaming revenues, and will provide Sprint PCS with a reasonable return on its network.
“While the new contract rates will lower the affiliates roaming revenue in the very near-term, we do not believe this will have a material effect on our expectations for the long-term since we had always modeled for a 5-percent year-over-year decline in travelling rates,” said Lehman Brothers in an equity research report. “Moreover, we believe that the establishment of the long-term agreement clears an overhang on the stock as it gives greater visibility to both the future roaming revenue stream as well as roaming costs.”
The rate, which has remained constant since Sprint PCS introduced its affiliate program in 1998, will drop from the current 20 cents per minute to 15 cents per minute beginning June 1, and to 12 cents per minute beginning Oct. 1. By next year, the rate will be “adjusted to provide a fair and reasonable return on the cost of the underlying network, or approximately 10 cents” per minute, according to Sprint PCS. The rate structure is expected to last the duration of the initial 20-year affiliation term.
While most of Sprint PCS’ affiliates have noted the new rates will have little effect on their future earnings, there is some concern smaller affiliates may see some negative results at least in the short term.
“While somewhat expected, the change in roaming rates will have an unequitable effect, in our opinion, within the affiliate group,” Deutsche Bank said in a report.
Deutsche Bank said it expects the larger affiliates, including Alamosa PCS, will see little effect since the carrier has a fairly large and mature subscriber base and a monthly ratio of inbound vs. outbound minutes of 1.2-to-1. Alamosa controls licenses covering 15.4 million potential customers in 12 states.
“However, for affiliates such as UbiquiTel PCS that are just beginning their growth stages, this change should result in a negative impact to their overall revenue for the short and medium term,” Deutsche Bank said.
While UbiquiTel said it expects the rate plan “should not have any material effect on its business plan,” the carrier’s recent quarterly financial release showed its average revenue per user was well over $100 with roaming revenue, but less than $62 without. UbiquiTel’s licensed markets cover approximately 7.7 million pops in nine states.
Deutsche Bank noted effects on AirGate PCS, with licenses covering 7.1 million pops in three states, would be somewhat buffered due to its markets including popular tourist’s destinations in the Southeast.
One affiliate that will not immediately be affected by the new rates is US Unwired Inc., which negotiated a separate deal with Sprint PCS to maintain its current reciprocal-roaming rate through the end of next year. Beginning in 2003, the rate will readjust in line with the other affiliates.
“We have a very favorable inbound to outbound traffic ratio,” said Robert Piper, president and chief executive officer of US Unwired. “The opportunity to retain the 20-cent reciprocal rate with Sprint PCS through 2002 provides our business plan additional flexibility. A decrease in this rate in 2003 will have a negligible impact because we expect that, as our subscriber base grows, the positive ratio with Sprint PCS will decline and roaming revenue will become a smaller percentage of our total revenue.”
Standard & Poor’s said the agreement would not impact the credit rating of Sprint PCS or any of the affiliates, noting “affiliates that depend heavily on inbound roaming revenue due to their limited buildout have sufficient cushion in their current ratings to absorb any short-term impact of the rate reduction.”
