FCC nears Cingular, AT&T decision

Another interesting article on this:


For Cingular, Now Comes the Hard Part
Business Week Online
Friday, October 01, 2004




The wireless industry's biggest deal in years is nearing completion. Service providers Cingular and AT&T Wireless (AWE) are expecting to receive Justice Dept. approval -- with some conditions possible -- of their megamerger early in the week of Oct. 4, BusinessWeek Online has learned. A later approval from the Federal Communications Commission (FCC), expected within weeks, will crown the combined company as the No. 1 U.S. wireless-service provider, pushing current king Verizon Wireless down a notch.

Both outfits have been laboring mightily over the past month to get regulatory approval. In September, Cingular sold its messaging unit and swapped some wireless operations with service provider Triton PCS (TPC). AT&T Wireless sold its stakes in service providers Eurotel Bratislava and Rogers Wireless (RCN).

All of these moves should clear the path to approval, says Richard Nespola, CEO of telecom consultancy Management Network Group in Overland Park, Kan. Additional divestitures of wireless spectrum and, possibly, pieces of AT&T Wireless's network might be required, but analysts believe they would likely be relatively minor.

SUBSCRIBER DRAIN. Even with trustbusters' approval, this merger -- the resulting company will be called Cingular -- won't be easy. Many analysts predict that 6% to 10% of the combined entity's 46.7 million subscribers will jump the boat in the next 12 months. That leaves an opening for Verizon Wireless, which boasted 40.4 million subscribers by the end of this year's second quarter and is growing much faster, to take back the top spot.

The Cingular-AT&T Wireless subscriber drain started earlier this year, as customers grumbled about AT&T Wireless' service quality and worried about the merger's aftershocks. AT&T Wireless' monthly churn has grown from 2.6% at the end of 2003 to a recent 3.4%. And both Cingular and AT&T Wireless were the only Top Six U.S. wireless-service providers to lose market share in the second quarter, according to market consultant Gartner. Big gainers included Verizon Wireless, Sprint PCS (PCS), Nextel (NXTL), and T-Mobile.

Subscriber losses could accelerate further, kicking off another pricing war, and leading to more consolidation in the wireless industry, says Nespola. To keep customers, Cingular might have to keep cutting rates that are already dropping by about 10% a year. Rivals would have to follow suit -- and feel the resulting bite on their earnings. That could force smaller wireless players to consolidate around current No. 7 wireless service provider Alltel (AT). Or perhaps a cable company could purchase one of the major wireless players, says Jeff Kagan, an independent telecom analyst in Marietta, Ga.

EASTERN POWERHOUSE. Worse yet, Cingular, a joint venture between telcos SBC (SBC) and BellSouth (BLS), is lesser known on the East Coast, where its parent companies don't operate, says Todd Rosenbluth, an analyst with rating service Standard & Poor's in New York.

Even with heavy marketing, it will always be at a disadvantage in those markets, vs. Verizon Wireless, Rosenbluth figures. One of Verizon Wireless's parents, telco Verizon (VZ), is a powerhouse in the East. And its relationship with Verizon Wireless allows the latter to offer bundles of discounted services in that region, such as wireline and wireless calling, that Cingular likely won't be able to match.

The new Cingular also might have trouble keeping up with Verizon Wireless' pace of innovation, says Rosenbluth. Cingular and AT&T Wireless have different billing and back-office systems. Until these are integrated and streamlined, the new company will have much higher costs when introducing new services.

HELP FROM JAPAN. Here's why: Assume the new Cingular offers its customers an ability to look up wireless numbers in a directory. To make such a service work, the system would need to dip into both AT&T Wireless' and Cingular's directories. The new Cingular's rivals will only need to check a single directory.

Such integration issues might be especially harmful, considering that both Cingular and AT&T Wireless are already lagging their peers in data services. Among the Big Six providers, each has rated last in data-services revenue growth, says Rosenbluth. That's troubling, since this is the fastest-growing wireless market.

Not all is bleak, of course. After their systems and staffs are integrated, the new Cingular could enjoy annual cost savings in the billions of dollars. And AT&T Wireless' minor investor and long-time partner, Japan's NTT DoCoMo (DCM), seems willing to work with Cingular on enhancing its data services. AT&T Wireless' m-mode data-services offering is certainly better than Cingular's, says telecommunications analyst Derek Kerton of Kerton Group in San Jose, Calif.

MOUNTAIN OF DEBT . Still, improving data services will take money -- which the new Cingular and its parents might not have. They will be deep in debt once the $41 billion merger with AT&T wireless goes through.

For instance, SBC, which already carries $15.1 billion of long-term debt on its books, will likely have to assume $10 billion more to make the purchase, estimates Jim Veneau, senior analyst with rating service Moody's in New York. As a result, on Sept. 28, S&P downgraded $86 billion worth of BellSouth, SBC, and Cingular long-term debt. The downgrade and the high debt levels could make sparing funds for enhancing Cingular's networks and services harder.

The two companies' operating results will also only get shakier -- at least in the short term -- after the merger. S&P expects SBC's margins before charges like depreciation and taxes to fall from 32.6% this year to 30% in 2005, partly because of the merger's high costs, and partly because the company's wireline business is facing more competition.

PRICE WAR AHEAD? If unable to match Verizon Wireless in services, the new Cingular might resort to competing more on price. Already, Cingular offers roll-over minutes and some of the lowest-cost plans in the industry. Its operating income had dropped from $829 million in the first half of 2003 to $578 million in the first half of this year. Further price cuts and higher costs could further hurt its performance.

The bottom line: Yes, in a few weeks Cingular might grab the No. 1 spot in wireless. But it's not standing on even ground. "They can't take their eye off the ball," says Kagan. "If they do, Verizon Wireless may pass them."

Visit www.businessweek.com for news, analysis, and commentary from the world's most widely read business publication.

 

Nice read Fire14. Things will be intersting. Only time will tell us how the end result will be. I think in the beginning things will be rocky for the new combined company and they will definitely have to keep their focus. I say Cingular shouldn't be trying so hard to be # 1, but should focus on integrating networks, billing systems, and build outs. Then once the solid foundation is set, go for the stars. I can see VZW trying to exploit any weaknesses found through the transitional period and I see both launching major ad campaigns. VZW has already started with the incessant radio and tv ads targeting adults and big businesses while Cingular seems to be aiming towards the younger college crowd touting rollover.

 

Thanks, I do agree they need to get the network & billing fully integrated ASAP & hopefully they will do Roaming handoffs within a 60 day period as someone had told me they are shooting for which will solve alot of concerns right away.