New cell networks seen as risky bets

What if nobody wants to watch TV on their phones? Analysts express doubt about 3G offerings.

U.S. wireless companies are investing billions of dollars in networks that deliver video and music to cell phones, but some investors worry whether the new services will turn a profit.

Sprint and Verizon Wireless--a venture of Verizon Communications and British carrier Vodafone--are spending billions on so-called third generation (3G) networks. These networks allow for wireless data speeds similar to wired high-speed Web access offered by phone companies to consumers.

Some analysts believe the investments will eventually pay off, with services that could command profit margins estimated as high as 60 percent. But others question when, or whether, these services will ever even turn a profit.

"We think 3G will be adopted, but we don't think it's going to be a significant financial benefit to the carriers," said Tim Ghriskey of Solaris Asset Management. Uncertainty around 3G is a main reason his firm does not include operator stocks in the $650 million worth of investments it manages.

Mobile providers around the world are betting advanced services will beef up profits, which have suffered as price wars eroded cell phone call rates by about 20 percent a year. Since most people already own a cell phone, operators compete on price to retain customers.

"Video streaming creates a very large revenue opportunity. I believe it's quite possible that could offset yield declines should they continue on the voice side," said Sprint Chief Financial Officer Bob Dellinger.

But Charter Equity analyst Ed Snyder says wireless stocks could come under pressure if the companies do not meet profit targets for wireless 3G services while voice prices continue to fall.

"The prospects at this point are poor," he said.

Sprint, Verizon Wireless and their biggest rival, Cingular Wireless--a venture of SBC Communications and BellSouth--declined to reveal specific 3G growth targets.

Executives from Verizon and Cingular say they expect strong growth from high-speed data services but note that it will not surpass voice in importance for the foreseeable future.

"I wouldn't tell you that's going to happen any time soon." said Peter Ritcher, chief financial officer of Cingular, which also plans to build a fast data network.

"Anyone who takes their eye off the voice market has taken their eye off their most important revenue stream," Verizon Wireless Chief Executive Denny Strigl said.

Some analysts say Verizon's 3G video phone service, available in about 30 U.S. markets, could have mass appeal. But so far the company has not given profit or customer growth targets.

"The only demand that makes any difference to investors is profitable demand," Charter's Snyder said. "If it turns out 3G is a flop, (operators) don't have nearly the potential for upside (Wall Street) has come to expect of them."

If experience in Asia is any indication, U.S. carriers have a long road ahead before they make easy money on 3G services.

Japan's NTT DoCoMo has offered 3G services for more than three years, and still struggles with heavy marketing costs.

Vodafone, the world's biggest mobile operator, began 3G services in 13 countries in November and expects 10 million customers by March 2006. No. 2 U.S. mobile service Verizon Wireless says data is its fastest growing business, bringing 5.6 percent of fourth-quarter service revenue. But most of this was from text messages on its older voice network.

"People will overpay"
One analyst calculated that Verizon, which plans to have high-speed data nationwide this year, could profit from its network after two years.

"That's certainly achievable," said Yankee Group analyst Roger Entner, who added Verizon would need to sign up about 5 million consumers and about 500,000 business users to pay for its data-only network. About 75,000 people used Verizon's three-city data network as of the end of September.

Entner's math includes the $1 billion Verizon has budgeted for network equipment, but excludes the steep costs of handset subsidies and extra airwaves needed to carry data services. Verizon committed last year to more than $4 billion in acquisitions that give it airwaves for both voice and data.

The popularity of musical ring tones, which were estimated to generate $3.5 billion in global revenue in 2003, encouraged A.T. Kearney consultant Eric Pritchett.

He said downloads of video and music to high-speed phones could create gross profit margins of about 60 percent compared with average margins of about 40 percent for voice calls.

High-speed music and video services could boost operator profits as early as 2006, said Tony Thornley, chief operating officer of wireless chip maker Qualcomm which plans a mobile television broadcast service that year.

Pritchett said he was confident that "People will overpay for content and media."

Story Copyright © 2005 Reuters Limited. All rights reserved.

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