NEW YORK-Taking the pulse of the domestic cellular and personal communications services sectors
as 1998 drew to a close, securities analysts from three major investment banks offered a positive prognosis for 1999
and beyond.
When the full-year count is completed, Donaldson, Lufkin & Jenrette Corp. is projecting the overall
number of subscribers will total 69 million, a 25.6-percent increase from the prior year. A rising growth rate on a rising
base will continue with unabated acceleration for the next 10 years, reaching 63.4 percent at the end of 2008, when
there will be 183 million wireless customers.
“Once again, we recently were forced to revise our forecast
upward,” Dennis Leibowitz, director of media/communications research for DLJ, said Dec. 17 at the Wireless
Industry Finance ’98 conference, sponsored by International Business Communications, Southborough,
Mass.
“Look for wireless penetration to triple from 21 percent last year (1997) to 63.4 percent by 2008 as
wireless approaches landline penetration rates.”
Inadequate signal strength is the primary impediment to
wireless’ goal of becoming a landline telephony replacement, said John M. Bensche, senior wireless services analyst for
Lehman Brothers Inc.
“You need five bars of signal strength for wireless to become a landline replacement,
and this creates an interesting play for tower companies building out (network) infrastructure,” he
said.
Prognostications of landline replacement by wireless telecommunications in the United States often are based
on the European experience, where incremental penetration rates are higher. However, there are at least three major
differences between here and there that should temper any foregone conclusions, said David A. Freedman,
telecommunications services analyst for Bear, Stearns & Co. Inc.
A single standard, Global System for Mobile
communications, dominates the European continent, whereas the United States has a polyglot of radio-frequency
technologies.
“European landline service is measured, expensive and of poor quality, so it makes (wireless)
substitution easy,” Freedman added.
Furthermore, prepaid calling, which is a key growth driver, takes
advantage of a cultural phenomenon, the commonplace usage of debit cards. In some countries, the tax code also
provides an incentive, exempting prepaid services from taxes imposed on telecommunications
subscriptions.
According to DLJ projections, personal communications services are gaining ground on cellular
telecommunications. Cellular subscribers accounted for 59.5 million, or 86.2 percent, of the 1998 total and 58 percent
of the new customer additions. By the end of 2008, PCS subscribers will total 84.45 million, representing a 46.1-
percent share of the total market and 70 percent of all new customer additions, said DLJ.
By then, when DLJ
projects an overall 63-percent penetration by wireless services in this country, cellular subscribers will account for 34
percentage points and PCS subscribers for 29 percentage points (of the 63 percent).
“Of the 29 percent on the
PCS side, 80 percent will belong to A (block) and B (block) carriers and 20 percent to Nextel (Communications
Inc.),” Leibowitz said.
“It will be hard for one additional PCS player to get cash flow, and that answers
the question of (the need for) additional licenses.”
Consequently, Leibowitz said he believes the potential
exists for more mergers and acquisitions of wireless carriers.
“Omnipoint (Communications Inc.) has publicly
stated it is looking for a strategic partner and may sell out altogether,” he said.
“As for the other
independent GSM carriers, the question is whether they can put together a national footprint and (their version of) a
Digital One Rate plan or will they consolidate into a handful of companies that will bundle with landline
service?”
The AT&T Wireless Services Inc. Digital One Rate plan, which some other carriers have emulated,
“is not the profit haven AT&T said, but it has simplified its rates and draws a strong contrast to long-distance
prices,” Freedman said.
Airtime costs consumers a dime a minute only if they use 500 minutes or less per
month, and carriers are counting for revenues on the prospect that their customers will “break out of the (500
minute) bundle,” Bensche said.
While Leibowitz said newcomers to a saturated wireless carrier market will
have trouble gaining cash flow, Bensche said incumbents have their own competitive concerns to
address.
“The key number is gross adds. If there are four players in a market and you assume each gets a
fourth, incumbents will have a real challenge in outswimming the disconnects,” he said.
“The [regional
Bell operating companies’] net adds year over year are poor, but they combine 1.9 (MHz) and 800 (MHz) markets so
you can’t see what’s going on.”
In general, however, Bensche characterized 1998 as a very good year for
wireless carriers because of the advent of one-rate plans, the expansion of networks to cover more of the population and
the declines in handset prices.
On the other hand, Freedman said, “I had hoped the industry had reached some
level of common sense about handset subsidies, so I am dismayed this quarter to see the rebates.
“Yes, I
understand that manufacturers are reducing prices, but why not keep some of the revenues?”
As an investment
opportunity, wireless carrier stocks are a reasonably good bet going forward, Leibowitz said.
“The market is
ignoring the forest, the macroeconomic factors like demand and growth, for the trees, the concerns about competitive
issues, capital (expense) requirements, etc.,” he said.
“The valuations are attractive. It is possible that
consumer demand will be greater than forecast. Potential for further consolidation is there and provides investment
opportunities.”
