CenturyTel and Cingular Wireless shows the industry's future direction

[jones]

Telecom's Next Wave: Alliances
The partnership between wireline provider CenturyTel and Cingular Wireless shows the industry's future direction
On Sept. 20, rural wireline carrier CenturyTel (CTL ; ranked buy; recent price: $33) announced that it will return to the wireless market, though on a much smaller scale than before. The telco signed a wireless reseller agreement with Cingular Wireless, with service to be launched late this year. The announcement comes on the heels of the partnership formed in August with EchoStar Communication's (DISH ; hold; $30) DISH network to offer satellite-TV service to CenturyTel's customers.

CenturyTel left the wireless business in 2002, selling operations covering some 700,000 subscribers to Alltel (AT ; buy; $55), because it couldn't compete against the national wireless carriers. What's different about its latest foray into wireless? Two things: First, CenturyTel is partnering with an industry-leading company rather than running its own network, and second, the company will most likely bundle together wireless service with wireline, DSL, and broadband products to offer to customers.

BIGGER PIECE OF THE PIE. With growth in traditional wireline services slowing, CenturyTel is going after a larger share of consumer spending on enhanced communications services. Consumer spending on bundled communications services, which includes wireline, wireless, Internet, and cable or satellite TV, has been climbing. According to market-research firm TNS Telecoms, households spent $160 a month, on average, on communications services in the second quarter of 2004, up 3% from the first quarter.

CenturyTel, along with such telcos as Qwest Communications (Q ; hold; $3.10), SBC Communications (SBC ; avoid; $26), and Sprint (FON ; avoid; $20), is competing fiercely with other local wireline, wireless, and cable-service providers, leading to losses in local-access lines. Looking ahead, competition will only grow with the launch of Internet telephony and the expansion of wireless broadband networks.

But unlike earlier periods, when telcos ratcheted up capital spending to boost growth and gain customer loyalty, partnerships are now the vogue as carriers try to reduce debt. Indeed, SBC cut its long-term debt by nearly 6% in the first six months of 2004. What makes the partnerships appealing is that they let one company provide new services to customers, while allowing its partner make use of excess capacity to become more efficient.

STRANGE BEDFELLOWS. S&P believes we're likely to see more of these partnerships in the future. In certain markets, partnerships help wireline carriers compete with cable-TV providers such as Cox Communications (COX ; hold; $33) or Time Warner (TWX ; accumulate; $16.50) for broadband customers. The partnerships also give EchoStar and other satellite providers a chance to lure customers away from cable TV.

To be sure, these partnerships sometimes make strange bedfellows. Before coupling with CenturyTel, Echostar partnered with SBC and Sprint. And in addition to the EchoStar alliance, Sprint has been partnering with outfits in other sectors of the communications industry. In 2004, Sprint began providing wireless services under the Qwest brand to Qwest's customers in the Western U.S. And Sprint is teaming up with cable companies in markets where it does not operate as a local carrier.

In late August, Sprint signed an agreement with Mediacom Communications (MCCC ; hold; $6.70), the eighth-largest cable operator in the U.S., which will allow the cable company to provide phone service in itsmarkets. Sprint will assist in switching and provide operator and directory services. Mediacom anticipates launching phone service in selected markets in the first half of 2005.

We expect more of these communications partnerships as companies seek to offer multiple high-quality services at a reasonable price. For telcos that don't currently offer wireline, wireless, cable/satellite TV, and Internet services, these alliances are imperative. And while it's too early to say for sure, we think these linkups will lead ultimately to greater revenues and customer loyalty.

Note: Todd Rosenbluth has no stock ownership or financial interest in any of the companies in his coverage area. All of the views expressed accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed. Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com