US Big 6 Operators 3G Overall Position

[Kenny]

US Big 6 Operators 3G Overall Position
3G.co.uk
21st March 2002

Ranked No. 1 and No. 2 by Technology Business Research's competitive benchmark, Verizon Wireless and Cingular Wireless are the best-positioned mobile operators in the United States with 24% and 18% of subscribers, respectively. Leveraging its size advantage and 3G migration path based on cdma2000, Verizon Wireless can now focus on improving ARPU (Average Revenue Per User) and profitability. However, Verizon Wireless's future in the global market is uncertain since it has a very precarious relationship with its joint venture owner Vodafone, which may look to sell off its stake to end the relationship.

Although Cingular's 3G migration by way of GSM/GPRS to EDGE is more complex, it will leave the company well positioned to align with or be acquired by a global player. However, Cingular is a moneymaker for SBC and BellSouth, its joint venture owners that seem to lack consensus on Cingular's future in the global wireless market.

"Capital costs and spectrum needs will compel AT&T Wireless, Cingular and VoiceStream to seek network sharing deals in 2002, which we believe will be a major stepping stone to further consolidation of mobile operators in 2003," stated NBQ wireless analyst Chris Foster (cfoster@tbri.com).

Sprint PCS and AT&T Wireless, ranked No. 3 and No. 4 by TBR, have 11% and 14% subscriber market share, respectively, in the United States, but the two companies have very different future outlooks. Sprint PCS, which is upgrading to 3G by way of cdma2000 starting with a mid-2002 1xRTT rollout, has focused on subscriber and revenue growth since its inception; yet, the company still lacks profitability. Sprint PCS will be a leader in providing 3G data services nationwide, but the company lacks a global strategy. AT&T Wireless is well positioned globally with its investor and partner NTT DoCoMo; however, AT&T Wireless is faced with more complex 3G upgrade path. AT&T Wireless has been profitable with the exception of this quarter's results, which included a writeoff of its fixed wireless business.

Ranked No. 5 by TBR's benchmark, Nextel Communications has an international division, but lacks the resources to become a dominant global player. Moreover, Nextel's 3G migration path is dependent on Motorola delivering an upgrade for its iDEN network infrastructure. Nextel has the highest ARPU and is the leader in capturing enterprise customers, which TBR believes should be a top priority of each mobile operator this year. However, Nextel's highly differentiated DirectConnect feature will likely be diluted as Verizon Wireless and Cingular introduce their own push-to-talk (PTT) features. To support its capital structure and to reach profitability, Nextel must maintain growth in a highly competitive market. TBR believes Nextel's best option is for Verizon Wireless or Cingular to acquire Nextel for its enterprise customers.

"Due to the high cost of fixed assets for a national wireless carrier, we believe carriers must establish a subscriber base of approximately 15 million before profitability can be attained," stated NBQ wireless analyst Jay Slattery (jslattery@tbri.com).

Lastly, VoiceStream Wireless, acquired by Deutsche Telekom for an astounding $30 billion in 2000, has limited subscriber market share in the United States and will not become a dominant player without further acquisitions by Deutsche Telekom. However, to VoiceStream's advantage, the company is an early mover in wireless LAN services with its acquisition of MobileStar and it plans to integrate public hot spot services with cellular services.

Beyond network buildouts and ARPU, mobile operators are most challenged to understand their competitive position in providing mobile data services, software and applications with or without partnerships and alliances, including with IT players such as IBM, Hewlett-Packard/Compaq, Electronic Data Systems, PricewaterhouseCoopers and Microsoft. "Mobile operators must reach beyond their traditional competitive environments of capex, subscriber growth and ARPU and grasp the opportunity of the new mobile service value chain by way of partnerships and alliances," stated Bill Lesieur (lesieur@tbri.com), TBR Director of Network Business Quarterly, "The value chain of mobile voice and data services will be forever changed by 2003, so mobile operators must embrace the change now or get pummeled by it."

IBM has big plans to be the dominant supplier of IT infrastructure to mobile operators and is seeking to own the layer between the IP core network and radio networks/phones. If IBM can land major partnerships with several of the top eight to 10 global operators, then it will be best positioned to dominate the enterprise market with 3G services and mobile Internet applications. Meanwhile, Microsoft clearly wants to dominate and control the software layer (operating system, browser, middleware) and application layer (in conjunction with its large installed base of developers), which will force the mobile phone and device makers to fight it out on hardware margins, leaving Microsoft as the only profitable player left in the end. Microsoft's business model is simple and clean, but its execution of the strategy to achieve its market goals is ruthless and cunning.

The future of the U.S. mobile operators depends on several key factors:

--Globalization: How well the operator is positioned to partner or be acquired by a global mobile operator.

--Consolidation: The ability to survive in a maturing market.

--Capital Structure: Ability to fund and build networks, scale operations and establish a global brand.

--3G Services: Ability to deliver data applications, software and mobile Internet services.

--Partnerships: Ability and willingness to partner with IT infrastructure, software and content providers.

--Acceptance: Mass-market customer adoption of 3G services and data application.