NEW YORK-With up to seven competitors in some large markets, price wars have begun that are not sustainable as a long-term business case for carriers, telecommunications executives said last week at the “Kagan Wireless Telecom Summit.”
“Verizon missed its additions significantly. When the big guys miss their targets, they become very aggressive. But price competition in some markets at 1 cent or one-and-a-half cents per minute is questionable,” said Jack Rooney, president and chief executive officer of US Cellular Corp.
“We are not sitting around passively watching someone take our market away, but we try to avoid getting ourselves into irrational price wars. Our networks are first class, and we try very hard to retain customers.”
G. Edward Evans, president of Dobson Communications, also noted that his company has “seen some irrational price competition from some players … (but) we offer a strong, high quality digital footprint, and people notice this.”
William Mounger, chairman of TeleCorp PCS, AT&T Wireless Services’ largest affiliate, said he has observed a “very aggressive rollout of Cingular Wireless and a strong Verizon branding campaign.” However, he said he expects some of the negative effects of increased competition and economic slowdown to be mitigated by declining interconnection, backhaul and billing costs.
By contrast, Leap Wireless, which has entered the Tennessee markets of US Cellular in Knoxville and of TeleCorp PCS in Chattanooga, Memphis and Nashville, seems to have served so far as a catalyst for overall customer growth.
“We continue to stay focused on wireless local loop, on putting landline into a mobile environment,” said Doug Hutcheson, senior vice president of wireless data development for Leap.
Mounger said he continuously queries sales people in his company’s Tennessee markets about the impact of Leap on TeleCorp’s business. “It surprises me, but they say there has been no impact except for some boost in all wireless use because of Leap,” he said.
In Knoxville, where US Cellular has an offering similar to Leap’s Cricket service, “we are performing extremely well, and Leap doesn’t seem to be competing with us,” Rooney said.
Ugly and uglier
In congested urban markets where US Cellular has capacity-constrained TDMA networks, it cannot offer new kinds of services because of concerns that the resulting spike in minutes of use would overload its system.
“For a TDMA player in dense markets, CDMA looks like a Siren Song from The Odyssey. It is an easier way, not an easy way to increase capacity. Or, as my chief engineer says, the choices are between ugly and ugliest,” Rooney said.
“But there are long-term implications about who your strategic allies are. You put yourself with a very limited number of players in each market when it comes to roaming and technology transfer … About what it comes down to is I’m going to flip a coin before the end of May and tell my board (of directors).”
Dobson, which also has both CDMA and TDMA networks “will be heavily reliant on the GAIT-phone concept, especially for GSM (roaming), ” Evans said. Its TDMA markets are not so congested that capacity is a problem, he added.
Like Dobson, TeleCorp PCS is on the lookout for “a GAIT phone that works on many technologies. Siemens said they would have one by year-end, but I don’t know if that’s real or not,” Mounger said.
Data plans
Leap, a spinoff of Qualcomm Inc., where Hutcheson previously was in charge of infrastructure marketing, is “staying tightly within CDMA, and we expect a 1xRT upgrade by the fourth quarter,” he said. “It remains to be seen in practice, but it should give us substantial, even doubling, of capacity. But that depends on handset makers, which continue to promise availability.”
On or about May 10, Leap plans commercial introduction of voice-based access to data delivery on all phones now used by or available to its customers. The marketing concept is that “data is an enabler, not necessarily a product,” Hutcheson said.
Dobson sees voice communications still commanding its longstanding lead as the killer application for wireless. However, the carrier is testing the data waters with a limited, soft launch of Web-based mobile services involving about 10,000 customers. Each generates an average of $10 in additional monthly revenues.
Although the economic slowdown has reduced foot traffic into its stores, Dobson has been successful in up-selling low-volume users.
“Right, wrong or indifferent, our industry flooded the market with $15 plans, and people put those phones in the glove compartment and don’t use them, especially in economic downturns,” Evans said.
Moving these customers to monthly plans costing $30 to $40 for large buckets of minutes results in a user base less likely to change service providers. Because churn is expensive and prepaid customers are more likely to churn, Evans said Dobson is managing its prepaid offerings so that such customers account for less than 8 percent of gross additions and less than 1 percent of the overall customer base.
Dobson’s digital subscribers also are less likely to churn than its analog subscribers. Consequently, the carrier plans to buck the national norm, in which 43 percent of all wireless customers still use analog phones. By year-end, it expects to have 80 percent of its customers using digital service.
“We have been aggressive in migrating our analog customers, but it costs $70 to $80 apiece to get them over there,” Evans said.
“The (stock) market tends to penalize you for this because of the short-term impact on EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). This is no different than spending money on customer relationship management or capital expenses.”
Executives of all four companies said they expect their capital expenditures this year to stay in line with guidance they already have given to Wall Street. By contrast, Sharon Armbrust, chief operating officer of Paul Kagan Associates, noted that Nextel Communications Inc. announced recently it was scaling back its projected capital expenses this year to $3 billion from $2.5 billion.
“But Nextel is a special case because it is a company perceived to be for sale, so it is reasonable to save money for the next guy,” she said.
3G spending
While Evans took issue with how Wall Street views expenditures for migrating analog customers to digital, US Cellular’s Rooney said he believes the investment community is not unreasonable in some respects.
“The $100 billion spent on third-generation licenses in Europe have left carriers with their fingers in their ears wondering what they are going to do with this spectrum,” he said.
“And shareholders rationally are reacting in fear they will end up paying for it instead of customers, which is the way it’s done in most industries,” he said.
While Rooney doesn’t expect 3G to repay its investment within the lifetimes of even the youngest wireless industry participants, he also noted that investors today are much less patient than they were when payback periods of 50 to 60 years were considered normal for regional Bell operating companies.
Like Evans, who criticized $15 monthly plans, Rooney condemned the wireless industry for giving away features that should be billable and for introducing engineer-driven technology without utility to end users in mind. As one example, he cited the 30 minutes it can take to find a local movie on a Web-enabled phone, compared with the five minutes required to buy the local newspaper and find the listings there.
Consequently, US Cellular was very cautious before embarking on its current full-scale rollout of one-way and two-way Short Message Service. “Two-way SMS is a real practical service, so long as the doctor who steps out of the network doe
sn’t walk off a cliff. Paging is, in many cases, two-way messaging, and it is critical to many industries,” Rooney said.
TeleCorp P
CS, which already offers SMS, is in the process of rolling out its Sunburst instant messaging service, Mounger said. It also is planning to debut voice-based portals, “which we think will be very successful,” he added.