With the wireless industry’s six largest operators now serving more than 90 percent of the country’s wireless subscribers, regional players continue to scramble for their pieces of the pie. Many of these carriers have managed to lower their dependence on volatile roaming revenues, but have found it difficult to make up for roaming income with internally driven revenues. Some players are beginning to look for exit strategies.
Regional operator Centennial Communications Corp. reported last week that it was “evaluating a range of possible strategic and financial alternatives,” for its operations. The company currently serves more than 500,000 wireless customers in six states in the Midwest and Southeast and owns wireless and cable operations in the Caribbean.
Like many of its compatriots, Centennial has suffered from the increased competition of its much larger rivals. Centennial also has been impacted by network quality issues due to technology migrations that the carrier was forced to undertake to maintain roaming revenues and access to the latest devices. Nearly every regional operator that has instituted a TDMA-to-GSM network migration has suffered short-term increases in customer churn, as well as sharp reductions in customer growth.
Centennial posted a 15-percent year-over-year drop in domestic customer additions during its fiscal fourth quarter and only a 4-percent increase in full-year customer additions. The carrier was witnessing more aggressive growth in its Caribbean operations, though analysts note much of that growth has been in low-quality prepaid customers and has raised questions about the carrier’s handset leasing policy.
Merrill Lynch released a report last week noting that CDMA-based regional operators appear to be fairing slightly better in the market than their GSM-based counterparts. The investment research firm partially attributed the CDMA advantage to a possible “halo effect” of nationwide operator Verizon Wireless’ perceived superior network quality and the continued TDMA-to-GSM migration issues impacting many operators.
Rural Cellular Corp. cited both technology and service-related issues associated with the recent migration of its legacy TDMA network to GSM technology in its Northeast, Northwest and South regions as contributors to its loss of nearly 10,000 customers during the second quarter.
Merrill Lynch also reported possible competitive issues for SunCom Wireless Holdings Inc. and Cincinnati Bell Inc., both of which recently have completed TDMA-to-GSM network transitions.
SunCom was singled out as attracting lower quality subscribers due to lower credit standards, and that nationwide competitors were indicating half of their new customers porting into nationwide networks in SunCom’s markets were coming from SunCom. Cincinnati Bell reportedly is seeing increased competition in Cincinnati from Verizon Wireless and is expected to see its current market-leading position further threatened by other nationwide operators.
Even regional operators that are having some success are not immune from M&A rumors. The Yankee Group recently released a report stating that Verizon Wireless should acquire Leap Wireless International Inc., which operates a flat-rate unlimited calling service in 37 markets across the country. Analysts have noted that Leap’s technology choices mirror those implemented by Verizon Wireless, including Leap’s deployment of Qualcomm Inc.’s BREW platform for downloadable content and its announcement this week that it plans to launch CDMA2000 1x EV-DO services beginning next year.
“Leap’s technology path does align well with Verizon,” noted IDC wireless services program director Scott Ellison.
A number of other regional CDMA carriers have announced similar plans, though most lack the sizable market position of Leap.
Exit strategies for GSM-based carriers appear more limited.
T-Mobile USA Inc.’s parent company Deutsche Telekom AG said last week that it was not interested in acquiring smaller carriers. Chief Executive Kai Uwe Ricke noted at an investor conference that it “doesn’t make sense to look at any of the smaller players and go for M&A here,” and instead said the company was more interested in acquiring new spectrum through upcoming auctions.
Cingular Wireless L.L.C. also is not expected to be aggressive in rolling up smaller operators as the carrier is spectrum rich following its acquisition of AT&T Wireless Services Inc. last year and seems content on working with rural carriers on deploying next-generation networks.
One bright spot could be Dobson Communications Corp., which following the latest round of M&As, has emerged as the industry’s seventh-largest operator. Following several years of wayward operations, Dobson has emerged as a strong regional player that some analysts noted is in place to reinforce its competitive position.
Despite past customer growth losses associated with its TDMA-to-GSM network conversion, the carrier’s GSM upgrades have boosted customer spending. The carrier reported average revenue per user has surged more than 13 percent during the past year from just more than $40 during the second quarter of 2004 to $45.28 this year. Dobson’s management added that GSM subscribers contributed $5 per month in data ARPU.
In addition, Dobson has signed new roaming agreements with Cingular and T-Mobile USA that are expected to provide a stable rate of return during the next several years.
Dobson also has been active in acquiring spectrum. Earlier this month, a pair of Dobson subsidiaries signed deals with Leap to acquire a 30-megahertz C-block license covering Anchorage, Ala., and a 10-megahertz E-block license covering Duluth, Minn., for $10 million. The deals strengthened Dobson’s presence in Alaska, where the carrier claims it’s currently the state’s largest operator providing service to 92 percent of Alaska’s population.
Dobson also is rumored to be a leading candidate in acquiring the Cellular One brand name from Alltel Corp., which is required to divest the brand per terms of its acquisition of Western Wireless Corp. Dobson is one of many regional operators that use the Cellular One brand name as a way of providing a bigger name for its service offering against larger carriers.
“With its balance sheet improving and license clusters scattered across the U.S., including a large cellular presence in Alaska, we expect Dobson will become more involved in M&A activity,” noted Raymond James & Associates telecommunications analyst Ric Prentiss.
